I Don't Understand This 50 Basis Point Rate Cut At All

David Dierking

The Fed, as expected, just cut interest rates by 50 basis points to combat the coronavirus.

I'll just be as straight as I can with it. I just don't get this rate cut at all.

I think it's safe to say at this point that the Fed has all but abandoned what it was originally established to do and is now in the business of supporting financial market asset prices at all costs. This is plain and simple a panic move by the Fed in a series of panic moves that dates back to Q4 2018.

Sure, I get that the Fed wanted to provide a psychological boost to the markets, but that's not the Fed's job. And besides, what good is it really going to do? Coronavirus cases are popping up all over the United States and it's about to get worse. There aren't nearly enough testing kits available to medical folks and the ones that are available may not even diagnose correctly. People who are supposed to be quarantined are somehow getting checked out of the hospital and spending the afternoon at the food court of a mall. How in the world are we prepared for this? If this turns into a pandemic and people are afraid to even leave their houses, is a cheaper rate on a 30-year mortgage going to make things better?

The coronavirus needs a medical solution, not an economic one.

That thought aside, the Fed is essentially giving up all ammunition in an effort to purely help prevent the Dow from falling. The markets fell in late 2018, the Fed pivots to a dovish position. This is the "strongest economy ever", the Fed cuts rates three times in 2019. The Dow drops 14% in a week, the Fed executes an "emergency" 50 basis point rate cut. Lest we forget that the Fed has also added nearly a half trillion dollars to its balance sheet in the past six months.

And the Dow is still in the red today.

I just don't get what the Fed is doing anymore. If the U.S. economy is ever in a position where it needs a true economic boost (and it is coming eventually), the Fed won't have any tools left because it blew them all when the unemployment rate was at 3.5%.

Yeesh.

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