The New York Stock Exchange, which suffered its worst losses since the Great Recession last week, opened on Monday with a slight rebound. But investors’ coronavirus fears likely aren’t assuaged. Rather, markets are now pricing in a 50-basis-point cut of the federal funds rate, anticipating that the Federal Reserve will follow central banks across the globe.
Market optimism over anticipated rate cuts is dangerous now for the same reason it has been generally in our post-Recession era. It’s also materially facile — celebrating the solution to a problem that doesn’t exist.
For far too long, the Fed has irresponsibly cut rates in times of stable growth, thus sabotaging the traditional monetary policy tools that are intended to stimulate the economy in the case of an actual recession. Whereas the Fed could slash rates from more than 5% during the 2008 crisis, rates today are at less than 2%, even as unemployment continues to hover near half-century lows and growth and markets have remained (outside of this recent panic) relatively consistent.
But this specific rate cut would prove even more asinine than usual because the problem with the coronavirus isn’t a capital or credit crunch, but a material supply shock. The coronavirus has disrupted the global supply chain, first with the quarantining (both mandatory and self-imposed, of workers producing intermediate goods), and soon, in domestic markets worldwide.
A vaccine could cure that problem. A rate cut won’t.
If Fed Chairman Jerome Powell does indeed announce a cut, we’ll get a temporary uptick in markets as we continue to kill our future monetary efficacy and fail to solve the underlying problem of the coronavirus. Only scientists and lawmakers, not central banks, can save us now.
