If the intention of the Federal Reserve was to calm financial markets in the face of the spreading coronavirus, which threatens U.S. and global economic growth, it failed badly.
After an initial rally following the surprising 0.50% cut in the federal funds rate, U.S. stocks whipsawed. The Dow Jones Industrial Average and Nasdaq ended the trading day down 3%, and the S&P 500 slipped 2%. The 10-year Treasury yield fell to 1%, its lowest level ever and 174 basis points from its yield a year ago.
Vanguard’s chief economist, Roger Aliaga-Diaz, criticized the rate cut as “premature given the lack of data suggesting a significant drag on the economy” and said it “could send the wrong signal to market participants.”
He called the cut — made weeks before the scheduled Federal Open Market Committee meeting — a “rare measure” last used during the global financial crisis in 2008 and a “high-risk bet” that could put the Fed in a “difficult position should conditions deteriorate further,” requiring forceful intervention then.
Economist and money manager Gary Shilling said of the Fed move, “If this doesn’t foretell a global recession and further big declines in equity prices, I don’t know what would. … Lower rates will probably not do anything to help the economy, and the whole exercise may backfire on the Fed by telling the world that it has panicked over the coronavirus.
Mark Haefele, global chief investment officer of UBS Global Wealth Management, suggested that “even though lower interest rates should be fundamentally positive for stocks,” investors “may be concerned about what [the cut] signals for economic developments in the months ahead.”
Given the Fed’s close contact with the business community, it “may already have evidence of economic disruption.”
Should that disruption lead to an economy sinking into recession, the federal funds rate could go back to zero and the Fed could “likely restart its quantitative easing program,” said Kathy Jones, chief fixed income strategist of the Schwab Center for Financial Research. “It’s too soon to say if that will happen, but it is a possibility longer term.”