The central bank cavalry is coming — be careful what you wish for

The Federal Reserve delivered Tuesday with a 50 basis-point rate cut, the first emergency cut between meetings since the Great Recession.

It came just hours after finance ministers and central bankers from G7 countries issued a statement, after a call led by Treasury Secretary Steven Mnuchin and Fed chief Jerome Powell.

“Given the potential impacts of COVID-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”

But there is growing concern it won’t be easy.

Cutting rates outside of regularly scheduled meetings signals an economy in crisis.

It hasn’t happened since the global economy teetered on the brink in 2008. Back then, the Fed cut interest rates three-quarters of a percentage point, from 4.25% to 3.5%. Before that, the last emergency rate cut was the morning the stock market reopened eight days after the terrorist attacks on 9/11/2001.

Think of emergency rate cuts as the crash cart in the emergency room, shocking the patient back to life.

But there is the risk that the Fed doesn’t have much firepower after 10 years of cutting rates and ballooning its balance sheet. The Fed funds target, the rate banks use as the base for short-term interest lending, is now only 1 to 1.25%.

And given the rare and historic nature of an emergency cut, there is the risk it further spooks the market, putting the coronavirus on par with an historic financial crisis or an attack on American soil.

“The Fed wasted what little ammo they had today in what looks like a loss of independence by giving into the calls for action by the President,” writes economist Chris Rupkey of MUFG Union Bank. The president last night tweeted he wanted a “big” rate cut, and after the Fed move said he wanted more cuts and more easing. The president has called for negative interest rates, something most economists view as dangerous.

“We aren’t in a recession yet, and today’s move won’t keep one from coming. Driving rates to zero didn’t help the economies of Japan and Europe, why are we trying it here?” Rupkey said. “It looks like the Fed is panicking.”

Other economists have noted that cutting rates does nothing to halt the spread of the virus or improve the government’s response.

Meanwhile, markets are counting not only on the Fed, but coordinated global rate cuts and other stimulus.

“A 50 basis point move, not 25, is necessary — along with an easing of Fed lending standards,” says Greg Valliere, chief US strategist at AGF Investments.

He says Congress needs to pass a modest stimulus bill to pay for face masks, testing and response. Business bridge loans or temporary tax breaks for companies and individuals may be necessary.

Whether Congress can deliver is the question.

“If it were me, I think I would try to coordinate a fiscal policy response, but that doesn’t seem to be looming right now,” economist Kevin Hassett, a former economic advisor to the Trump White House, told CNN. “Maybe in broken Washington…the Fed decided to move.”

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