The Federal Reserve cut in interest rates to near-zero will have little effect on the impacts of the coronavirus and do nothing to curb an upcoming recession. The Fed also announced plans to buy $700 billion in government securities.
This dramatic move, not seen since the 2008 financial crises, was forced on the Fed by Donald J. Trump to create a false image that the economy will continue to grow at its 2.1 percent rate despite the effects of the coronavirus and an emerging recession.
“It’s great news” and “great for our country,” Trump told reporters at the White House, adding that the Fed’s announcement should cheer financial markets. Just on Friday, Trump had said he could demote Fed Chairman Jerome Powell, whom he had appointed, from the top job at the Fed.
On Thursday, the Dow fell 2,352 points, or about 10% — its most significant one-day drop since the Black Monday crash of October 1987. The next day, The Dow Jones Industrial Average grew 1,985 points, more than 9%, and closed at 23,185. The S&P 500 index also jumped more than 9%, closing at 2,711.
Nonetheless, major stock indexes are down at least 20% from their recent record highs, which puts the bear market territory after an 11-year winning streak. The Dow has fallen nearly 6,400 points since Feb. 12.[i]
Wall Street investors drive this up and down spiral. Their behavior combines with the Nation’s historic widespread cessation of spending driven by unrestrained coronavirus panic. These two factors combine with a lack of faith in its verifiably untruthful President signals a recession that could mean lost jobs, lost income, and lost wealth for millions of Americans.
Lowering borrowing costs ultimately leads to risky lending, which creates a bubble bursting situation very much like the housing market crash at the same time the Fed has less room to maneuver.
“The Fed feels the need to come in and save the day like Superman, but all the Fed is going to do is encourage more corporate debt,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “It’s not going to help, and then the Fed will keep cutting.”
These latest Trump antics add to his spooky trade war policies, which have already caused business investment to plunge, according to the latest Commerce Department report.
Manufacturing, although only about 10 percent of the economy, was in a technical recession for the first half of the year, and conditions in Europe and China remain weak.
Endnote:
[i] Schneider, Avie, “Dow Soars Nearly 2,000 Points in Rebound From Biggest Drop Since 1987, at: https://www.npr.org/2020/03/13/815344533/dow-expected-to-open-up-more-than-1-100-points
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