Stock market takes record fall despite emergency Fed rate cuts
WASHINGTON (Sinclair Broadcast Group) — President Donald Trump was pleased Sunday that the Federal Reserve had slashed interest rates to near zero percent, a step he has been demanding since long before the coronavirus outbreak spooked investors and sent the stock market tumbling in recent weeks.
“They did it in one step; they didn't do it in four steps over a long period of time,” Trump said at a White House press conference minutes after Federal Reserve Chairman Jerome Powell made the announcement. “They did it in one step. And I think that people in the market should be very thrilled.”
The people in the market did not appear to be thrilled, at least initially. Stock futures plummeted late Sunday and the New York Stock Exchange had to halt trading soon after opening Monday following a 2,000-point drop in the Dow Jones Industrial Average. By the end of the day, the Dow had dipped nearly 3,000, the most in a single day in history.
The cut in benchmark interest rates to zero to 0.25% came after an emergency meeting of the Federal Open Market Committee, which took several drastic steps to head off a potential economic downturn resulting from the public health crisis. The Fed also announced plans to buy at least $500 billion in U.S. Treasury bonds and $200 billion in mortgage-backed securities in the coming months.
“Economic policy experts must do what we can to ease hardship caused by the disruption to the economy,” Powell told reporters Sunday evening. “We are prepared to use our full range of tools to support the flow of credit to households and businesses.”
The moves came after the Fed issued another emergency interest rate cut earlier this month and injected $1.5 trillion into the bond market last week amid days of steep declines in the markets. Economists say investors are panicking as COVID-19 infections spread across the country and the government struggles to get a handle on the problem.
The virus outbreak has already caused significant economic disruptions and more are likely coming in the near future. Several states have ordered bars, restaurants, and other businesses to close as Americans are urged to avoid public gatherings and non-essential travel, and others are considering similar restrictions with no clear end to the outbreak in sight.
“With individuals and small businesses and travel-related industries, I think the market’s reaction is more a sign that fundamental shifts are starting to rock our economy... We are sort of in unknown territory for the moment,” said Clifford Rossi, a former chief risk officer for Citigroup and a professor of practice at the University of Maryland School of Business.
Finance experts say the Fed’s dramatic emergency measures may have sparked fears the economy is in even worse shape than it seems. Rate cuts are typically good for economic stimulus, but this large of a cut so early in the crisis caused concern on Wall Street.
“There is a signal to the market about how deep the Fed thinks a virus-induced recession could be, and that affects the psychology of investors, their profitability forecasts, and the perceived risk surrounding those forecasts,” said Michael Noel, a competition economist at Texas Tech University.
According to Gabriel Ehrlich, director of the Research Seminar in Quantitative Economics at the University of Michigan and a former Congressional Budget Office analyst, the uncertainty created by the coronavirus and related social and economic upheaval runs deep, and the markets’ performance Monday might have been worse if the Fed had done nothing.
“I think there was a general sense of panic, he said. “I don’t think the Fed’s announcement is what caused the plunge in the markets.”
Derek Klock, an associate professor of practice at Virginia Tech University and former investment consultant, noted several other factors that may have contributed to pessimism heading into Monday’s trading besides the Fed’s actions. New economic data out of China and the U.S. manufacturing industry set an ominous tone, and an unprecedented warning from the Centers for Disease Control and Prevention to avoid gatherings of more than 50 people for eight weeks signaled the outbreak could last longer than expected.
“The markets are attempting to predict both the severity and length of the downturn and each new day comes with new and sometimes disappointing information,” Klock said.
Between rate cuts and quantitative easing, Sunday’s announcement amounted to the Fed unfurling nearly all of the conventional tools it has to fight a recession. Rossi warned those measures may not be as effective now as they were against the 2008 financial crisis because a pandemic-induced panic is a very different economic challenge.
“It’s kind of going back to fight the last war,” he said.
Unlike other recent economic tailspins the nation has struggled through, this is a global health and safety issue that could have a prolonged impact on the world economy. The problem is not that banks are collapsing but that businesses are shutting down or facing steep declines in revenue for weeks or months to come.
“People are dying now,” Rossi said. “When that happens, the big issue is you have consumer confidence not only being wiped out but also the personal safety issues, and the fact that there is so much uncertainty about what lies around the corner is going to create significant headwinds on our economy.”
The fact that the fundamental cause of the current upheaval is medical rather than economic also undermines the value of slashing interest rates at this moment. Lower rates should spur economic activity, but the public is being urged to curtail economic activity to prevent the spread of the virus.
“Interest rate cuts are a supply side solution to what is mostly a demand side problem, and not a demand side problem we are trying to undo, at least until the virus has been satisfactorily dealt with,” Noel said.
Powell also announced a reduction in the discount rate by which banks can borrow from the Fed by 1.5 points to 0.25%. Jason Kelly, author of “The 3% Signal” and the “Kelly Letter” investment newsletter, said that could help average Americans by making credit easily available to those who need loans.
“It enables banks to borrow from the Fed without sparking rumors that they are having financial trouble and could not find help anywhere else,” Kelly said. “With a rate this low, every bank will borrow for the great deal. Nobody will stand out.”
Another day of big losses on Wall Street Monday will put more pressure on Congress and the Trump administration to provide stimulus to offset the disruption of the economy caused by the virus and the nation’s response to it. The House passed a relief bill negotiated with the White House Friday that is awaiting action in the Senate this week.
That legislation provides limited guaranteed sick leave for some workers, ensures free virus testing, and bolsters unemployment benefits and food assistance. Treasury Secretary Steve Mnuchin indicated more federal action is coming, but the rocky path to getting this modest stimulus bill passed suggests more expansive measures could become politically fraught.
“The government can take measures to provide unemployed workers with assistance, to create special programs to support especially hard-hit industries, and similar type measures,” said Paul Kupiec, a resident scholar at the American Enterprise Institute. “The composition of policy measures is usually heavily contested politically, and they often contain pork barrel-type expenditures to achieve compromise.”
President Trump has spoken of potential federal assistance for the travel industry and other businesses directly impacted by the outbreak, though White House officials have been reticent to call it a bailout.
“We don’t see the airlines failing, but if they get into a cash crunch we’re going to try to help them,” White House economic adviser Larry Kudlow told reporters Monday.
According to Noel, federally-backed loans to small businesses in danger of bankruptcy and emergency tax relief for laid-off and underemployed workers would be significant steps for the federal government to take to mitigate the fallout. However, he also stressed the importance of effectively and accurately communicating to the public about the virus and working to stop its spread before lasting harm is done to the economy.
“Remember that the economic slowdown is not the source of the problem, but one large symptom of the problem,” he said. “Once you cure the disease, the symptoms go away.”
Depending on how long that takes and how bad things get, Kelly said there are more extreme steps the Fed could take. Powell seemed to rule out setting negative interest rates Sunday, but the Fed could purchase more assets to prop up markets.
“It has unlimited purchasing power given its ability to print money,” Kelly said. “Unleashing this power could diminish the value of the U.S. dollar by signaling that there is an infinite supply of the currency, but this might become an afterthought in a financial triage moment. Deal with it later.”
The Dow fell 12% Monday after rising about 10% Friday. If such wild swings continue, Kelly also suggested the government should not rule out shutting down the stock markets for a period of time, as it did after the 9/11 terrorist attacks in 2001.
“The stock market falling 10% one day, rising 10% the next, then falling 10% again is hard on people and the financial system,” he said. “It would give everybody one less thing to worry about if it were put on ice for a while.”
The Fed indicated Sunday that interest rates may remain at or near zero for a while, even after the coronavirus is under control. Assuming the pandemic fades in the coming months and daily life returns to normal, the long-term effects on the economy and the average American could outweigh the initial impact on stock prices and investor confidence.
“The Fed move will help financial markets and institutions get through the crisis, but it will have little impact on regular people--at least in the short run,” Kupiec said. “People out of work normally don't care so much about bank lending rates because banks are not going to give them loans anyway.”
Over time, lower rates on debt and loans should provide benefits for many, including those looking to refinance mortgages, but they could also present complications for retirees and others counting on the return from their savings to get by.
“I do think it takes time for interest rate cuts to filter through to the average household directly,” Ehrlich said.
President Trump announced new guidance to the public Monday intended to get COVID-19 infections under control in the next 15 days. If that effort succeeds, the reduction in interest rates may help the economy bounce back more rapidly in the months ahead.
“Nothing is going to make the near-term better until we see new infections start to abate,” Klock said. “However, all of the monetary and fiscal response should make the overhang shorter and less painful. So once we get beyond the health care crisis, then the recovery should be swift and dramatic.”
