After weeks of volatility in the stock market, the U.S. economy could be on the verge of a recession following the coronavirus pandemic.
To give you an idea of how wild things have been on Wall Street, many people have compared what’s happening now with the 2008 financial crisis, in which the subprime housing bubble burst caused banks and financial institutions around the world to fail.
Since Feb. 27, the stock market has experienced 1,000-point swings almost every day of trading. It’s come to the point where the government has had to step in and provide some stability. That’s where the Federal Reserve comes in.
On Sunday, March 15, Fed Chairman Jerome Powell announced that the interest rate target would be cut to a range of 0% to 0.25%. This came two weeks after the Fed cut rates to 0.5%. Additionally, the Fed is injecting the economy with a quantitative easing package by purchasing $700 billion in government bonds and mortgage-backed securities, which is something the Fed did during the Great Recession to keep the American economy running.
President Trump, who has been critical of the Fed for not cutting interest rates sooner, welcomed the news.
“That’s really great for our country,” Trump told reporters in the White House briefing room. “It’s something that we’re very happy, I have to say this, I’m very happy. And they did it in one step, they didn’t do it in four steps over a long period of time. They did it in one step, and I think that people in the market should be very thrilled.”
Investors and businesses fear the economy is going to collapse, so they’re making sure they can keep as much of their money as possible, hence the massive market sell-off.
The federal government is responding by injecting billions of dollars into these safe havens to provide some relief to these financial institutions. Banks can continue lending money at low risk so people can remain financially solvent.
Bottom line: The coronavirus situation is likely going to get worse before it gets better. The federal government understands that, and that’s why it’s stepped in the way it has with respect to the economy.
