"Financial markets were underwhelmed after the big rally on Monday, which may speak to the limited effect that lower interest rates can have on the supply shock of a pandemic." WSJ editorial ('The Coronavirus 'Stimulus') today, p. A16.
The new OECD forecast of lower global growth owing to the spread of COVID-19 was sobering (WSJ, p. A9) . But instead of heeding that warning and acting in a rational, judicious way (like the "adult in the room") the Fed appears hell bent on ignoring it to placate and feed investors' addictions for easy money infusions. Oh, and stoking the already senescent BULL market while appeasing Trump.
The good news is that the Street isn't biting, and so the markets tumbled by over 785 points yesterday despite Powell's needless intervention. The bad news is that by today the Wall Street traders may believe Jerome Powell's craven move to mollify Trump (with a 50 basis point rate cut) will work and drive the markets up via unwarranted irrational exuberance. We are in turbulent times, folks, so buckle you financial seat belts.
For those who've been pressed to keep up with the news cycle, the U.S. Federal Reserve yesterday slashed interest rates 0.5% in an emergency (more like desperate) move to try to protect the American economy from the coronavirus outbreak, ramping up the global response as the disease spreads. It is an absurd and pathetic move as I pointed out in my post three days earlier, noting bluntly:
"But this can't last and can't keep happening. Powell, no matter how desperate to appease Trump and keep the great Bull rolling on, has exhausted virtually all his ammo and hasn't much left in case an actual recession hits....I also expect any more tricks or efforts at manipulation of the markets by Powell - or Trump using happy talk- will not work. Stocks will remain volatile even if some minor recovery 'burps' manifest"
And that transpired as the DOW tanked by more than 700 pts. yesterday on the news. Interest rates are now set in a 1 percent to 1.25 percent range, and Powell, the Fed chair, signaled that further moves were possible. He bleated this signal of obeisance to his master, Donnie Dotard:
“The virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad, for some time,”
Adding:
The Fed was “prepared to use our tools and act appropriately, depending on the flow of events.”
We are led to believe here the Powell Fed is adrift in a mindless sea, with no clue at all that no monetary policy intervention can affect a supply side threat. Hell, even The Wall Street Journal editorial today questioned Powell's move, writing (p. A16):
"Will this make much of an economic difference? Count us as skeptical. Financial conditions weren't tight even with a flight to the safety of U.S. Treasurys...But this relates mainly to the damage to global supply chains and expected limits on travel and commerce as the world tries to mitigate the rates of infection. Nobody is going to take that flight to Tokyo because the Fed is suddenly paying less on excess reserves."
WSJ columnist Greg Ip ('Fiscal Policy, Not Fed, Is Best Virus Remedy', p. A2) also saw right through the Fed ruse, e.g.
"The Fed cannot save the U.S. economy from the coronavirus for two reasons: first, it can't restart factories that are missing parts as the virus disrupts supply chains, nor can it persuade worried travelers to fly. Second and more importantly, central banks are losing their grip on the business cycle."
Yet Powell had the nerve to spout in the aftermath of his reckless and cynical move (WSJ, p. A7):
"A rate cut will not reduce the rate of infection. It won't fix a broken supply chain. We get that. But we do believe that our action will provide a meaningful boost to the economy."
Give me a break. Do you think we're all as stupid and brain-damaged as Dotard? It makes little or no sense when clearly fiscal Keynesian -style moves would be better. Hence, Powell is simply responding like a timid pet to Trump's threats and howls. He has to know in his mind based on experience none of these interventions is appropriate nor will any similar intrusions be. He also seems to forget that similar radical efforts by Bernanke after Lehman crashed and burned before the 2008 credit meltdown had little or no effect. The only thing that saved the day was a fiscal policy intervention, i.e. the Obama administration getting a $797 b stimulus package passed in early 2009, which added massively to the deficit. (In hindsight, the Obama stimulus ought to have been more like $1.5 billion.)
This was a sad and desperate intervention even as the central banks of the G7 group of nations also promised action around the world to protect jobs and growth amid the unfolding crisis One they have to know that rationally is exogenous and hence they have little power to contain. I mean, can they prevent mass quarantines of whole cities? Can they prevent the 975 million lbs. of meats now rotting in warehouses and containers and ships according to the WSJ? Can they prevent airlines from curbing flights when few want to fly? Can they order people to leave their homes and go out to dine, or to basketball games or whatever? Give me a break.
So it was little wonder the market tumbled and Powell's gimmick "Failed to ease fears" (Financial Times headline). Hell, the 10 year Treasury note even went to its lowest level, below 1 percent. Quoted in the FT piece, Seema Shah of Principal Global Investors offered the best take and one Powell and the Fed ought to absorb:
"Certainly, rate cuts will not help restock emptying grocery shelves. Monetary policy is hopeless when supply cannot feed demand."
So as I asked in my earlier post: Is anyone at the helm of this nation operating with an IQ over zero?
Launching the emergency measure as a "pre-emptive strike" to protect the U.S. economy after pressure from Hitler Jr......errr...Trump to act, Powell warned: “The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity.”
Well, excuse me, but I'd say Trump (who tweeted 80 separate attacks on the Fed last year) is more of a threat and to the Fed's independence. And if the markets can't trust Powell and the Fed to exercise that independence, who or what can they trust? So no wonder the markets tanked because investors - at least the savvy and rationally cynical ones - didn't buy that Powell's move was for "the benefit of the economy". It was for the benefit of Trump. Powell tried to dodge that by offering this bunkum:
“Of course the ultimate solutions to this challenge will come from others, particularly health professionals. We can and will do our part, however, to keep the US economy strong as we meet this challenge.”
“Of course the ultimate solutions to this challenge will come from others, particularly health professionals. We can and will do our part, however, to keep the US economy strong as we meet this challenge.”
The problem as I warned before is that this leaves essentially nothing in the tank in the case of a recession. What? The Fed will now go into negative interest rates in an effort to appease Trump? See e.g.
Powell has asserted the emergency move was not in response to the president’s pressure, insisting:
“We are never going to consider any political considerations whatsoever,”
Sorry, Powell, but all your protestations ring hollow. Given you had to know this move was futile, it is laden with only political considerations.
“We are never going to consider any political considerations whatsoever,”
Any consolation 'prize' for Powell yesterday? Well, yeah, the FTSE 100 closed up around 1% at 6,718.20. Whoopee do!
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