Fed quick take
So, the Fed is trying to rescue the market with a 50 basis points emergency cut. I will publish a longer, more fundamental piece about the signal this action sends to investors and the markets and the long-term implications on Wednesday, 18 March before the next Fed Open Market Committee meeting. But here are some quick takes:
Apparently, the answer to everything is a rate cut, quantitative easing or both. It doesn’t matter that the Covid-19 epidemic leads to a decline of supply while rate cuts address a decline of demand. Rate cuts can do nothing to help alleviate the growth slowdown due to disruptions of global supply chains. All they can do is lift sentiment and stock prices.
If we continue on this path, we might end up here:
It is impressive how quickly the Fed reacted. A market that declined for one week by about 10% to 15% is now enough to trigger the same monetary stimulus as the beginning of the Global Financial Crisis in late 2007.
If you think rates are low today, you might want to read my latest post for Enterprising Investor. It could well be that interest rates will never normalise to levels seen in the past.
I wonder what people in Sweden, Switzerland, and Denmark are supposed to do now? The ECB will likely follow the Fed and cut rates even more, which triggers another round of rate cuts at the Swiss National Bank and the Swedish Riksbank. I have talked about the implications for savers and investors here.
Also, remember that I wrote this morning that the economy is likely going to be fine, particularly in the United States. The people who will be suffering the unintended consequences of the Fed’s actions today are going to be savers in Germany, Sweden, and Switzerland as well as businesses in emerging markets.