From what I gather after spending more time than I'm willing to admit listening to every finance talking head out there, the consensus on the street seems to be that this will result in a temporary market recovery followed by the continued deterioration of stock prices given that fiscal or monetary* policy can't really affect the real economy in the near term* i.e. if the supply chain is indeed impacted due to COVID-19, no amount of fiscal or monetary* stimulus can make up for the time / productivity losses in the near term*<p>On the margin, I'm still slightly bearish on the whole situation due to the combination of the virus' absurdly high infection rate[0] and its long incubation period (I'll let each one of you be the judge of how long that is...)<p>[0] <a href="https://duckduckgo.com/?q=infection+rate+sars+vs+coronavirus&ia=images&iax=images" rel="nofollow">https://duckduckgo.com/?q=infection+rate+sars+vs+coronavirus...</a>
For those saying the Fed is running out of ammunition, study what the Bank of Japan has done.<p>It owns close to 80% of the Japanese ETF market currently, with no end to the expansion of balance sheet in sight.<p>After buying long treasuries, it's not unreasonable to imagine the Fed buying stocks, either individual issues or ETFs. The President would be for it, and it would be hard to drum up any opposition to it in congress.<p>Not only that, but rates on long treasuries have stayed negative for long periods of time in other countries. It's an open question how negative long treasuries can go, but the evidence suggests we're not even close to the limit.<p>Recessions are politically unacceptable in today's world. Buy stocks. Buy treasuries. Do so with wild abandon, because the Fed has your back. Just watch out for the moment when the whole thing jumps into reverse and no amount of market manipulation will stop the bleeding.
We're basically running out of tools to combat an actual financial crisis. <a href="https://www.investopedia.com/terms/l/liquiditytrap.asp" rel="nofollow">https://www.investopedia.com/terms/l/liquiditytrap.asp</a>
Interest rates have been on a secular decline over the course of the last century. Different economists have described this via various terms- "savings glut" is the one I like the most (even though I don't like Krugman). Right now there is so much saved cash out there looking to be lent out that any project looking for financing can find it for cheap.<p>The Fed does not keep interest rates low in a vacuum. There is an auction system that determines real rates. If the Fed is not able to sell all their bonds at the target rate, they have to adjust.<p>In the long run, I think we will see:<p>1. (at risk of calling this bull market a "new normal") P/E ratios for stock will continue to climb in a secular fashion. Low returns from the alternative investment of bonds will dictate high P/E ratios.<p>2. Debt financing will remain cheap. Low interest rates signal cash that is desperate to find a place to park it.<p>3. Government debt will remain popular and affordable. This is a win for Keynesians.<p>4. Secular low interest rates are an indicator of a stable and mature economy, which is good. The bad part is that they signal a world where obvious available capital investment projects are missing- we seem to have picked the low hanging fruit.<p>5. Next recession the U.S. will hit the zero lower bound, and we will see lots of QE and/or nominal negative interest rates through some institutional mechanism.<p>6. Increasing government deficits look better when interest rates are low.<p>7. Speculative: Deficit spending can increase indefinitely if real interest rates are below 0 (aka nominal rates are below inflation). To put it in other terms: Any deficit spending is free money up until the point that it causes inflation to rise about the nominal interest rate.
Pardon my cynicism, but it seems like many of the actions the administration is pushing are simply things they were pushing already and are using this health crisis as cudgel to help get what they want.<p>What we need are lower interest rates! What we need is to limit immigration from Mexico (even though the US has a higher infection rate and there isn't any talk of limiting flights from, say, England). What we need to do is silence domain experts and have communications controlled by politicians at the White House.<p>Maybe this rate cut is actually the right thing to do, what do I know? But I have little reason to believe it was made for the right reasons.
China started with single digit cases, which then spread countrywide with tens of thousands of cases and many deaths. They quarantined cities, built 1000 bed hospitals in 10 days. And now after about 2 months they are seeing a slowdown.<p>Why would this exact scenario regarding growth in the number of cases not play out in the US? The only difference is smaller population, but cities are dense here too.<p>However, unlike China, I don't think US and other countries will be able to quarantine entire cities.<p>They only hope IMHO is that the virus becomes less virulent with as summer approaches.
This is not solving the problem which is 1) the US is drastically behind in testing the population 2) it will not fix disrupted international supply chains 3) it will not fix liquidity crises at health insurers, hospitals, and life insurers and 4) it will not fix demand if people do not want to go shopping at any price because of non-financial concerns.<p>I presume the Fed knows this, and what worse is this seems to be due to political pressure.<p>Finally, when this does not work, it will reduce peoples' faith in the Fed.
Keeping the party going by drinking rubbing alcohol.<p>What would be hilarious/terrible is if this attempt to juice the markets doesn't prevent a sea of red at EOD.
Most of the risks to the economy posed by COVID19 are supply side. How is a rate cute going to help? It seems like the main consequence of this in the near term is an increase in inflation.
50 bps cut, initial rally, faded super fast and now down for the day. Would be interested to see if Fed cuts further.<p>The first order effects weren't so large to stem the selloff (first order meaning the PV effect of lowering discount rate).<p>As for second order effects (rate cuts to spur economic activity), I'm not even bullish about the mechanism to transmit rate cuts to the real economy normally, but I think in a quarantine situation, those mechanisms are even more diminished as there's less economic activity. Thinking out loud, demand will probably just hit a wall--there's no elasticity here when people are worried about their lives.<p>The only mechanism that sounds plausible to flow through to the real economy is fiscal. Government buys Pampers, burns them, buys them again. Or keep lowering rates to raise asset prices by a purely mechanical lowering of discount factor.
It's well-understand how low interest rates boost the economy in the medium- and long-term. Companies deploy cheap capital to build new factories, and consumers buy more appliances, cars, and houses.<p>What short term behavior changes do emergency rate cuts cause to boost the economy? Are there capital projects that can get started in weeks, that were previously shelved because the rates were 0.5% too high, but are now viable? What sort of projects would these be?
Does this mean the meeting on march 18th (where there was almost a 100% chance of a rate cut going through) is not happening anymore? [0]<p>I can't tell if they've just not yet updated that page.<p>[0] <a href="https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html" rel="nofollow">https://www.cmegroup.com/trading/interest-rates/countdown-to...</a>
I don't want to sound overly negative but at least hedging with puts (and not gambling but sane expiry dates) against index funds isn't a bad idea. Cutting rates by a half point is panic football and won't fix the supply chain hiccups which will affect production and therefore consumption.
I had some call options on Robinhood that I wanted to sell after the spike caused by this rate hike. Now I'm watching my gains slowly go away since Robinhood is down again. Two days in a row.
This abrupt move by the Fed betrays lack of knowledge of stock market psychology. Looking at how stocks are doing today you would not think that anything of interest has happened (no pun intended).<p>The stock market psychology works on "buy on rumor, sell on news" principle. This is the reason there was a significant rally yesterday, and stocks are in negative territory today.<p>What the Fed should have done is give signals that they are about to cut interest rates, then give stronger signals, then even stronger signals, then cut interest rate by 0.25% then repeat for the next 0.25%. Markets would have rallied multiple times for each good news signal.
This will further increase housing prices, no? How much more unobtainable for the average American could they possibly get?<p>I suppose negative interest rates will let us know shortly!
This seems like a bad move.<p>It isn't going to help, because it doesn't address the actual cause at all -- but it will help heighten the panic
This is a big mistake. There is nothing the Fed can do revive the economy from the Corona virus, because this is not a demand problem, it is a supply problem. The economy WILL slow down because the major parts of the economic chain have been considerably affected by this virus. You cannot use more money when there is less to buy and sell. This will happen simply because whatever solution to the virus disruption will take time to be implemented.
I'm retired and mostly not in the market. I won't invest in the market while it is overpriced. With such low interest rates, what is a safe investment?
I'm looking to refinance. If my lender says the rate hasn't changed from 3.25% since last week, that's bullshit Right?<p>How long should I wait for the rates to move?
I wonder if economic indicators will temporary blip up because of stockpiling. I recently bought $1000 of food and supplies and books and toys for my kids if they get stuck indoors which would have normally taken me six months to buy.
So every safety in our country and economy is now disabled, air and water regulations food regulations,taxes cut to flatline levels for industry, all in the name of profit. Now the monetary system is being tampered with further.<p>All reserves are gone. Imagine trying to climb out of this ditch if something <i>really</i> bad happened (like say a million people die).
This is the start of the next Global Financial Crisis folks. It's not hard to see the pieces in motion now:<p>1 - The Q1 supply shock is going to be a temporary thing. They'll recover alright after causing some companies to miss their Q1 earnings. If this was the only effect, we would recover just fine here later this year, but...<p>2 - Coronavirus is just getting started in the US and Europe. If it spreads widely, and unabated, then the those countries will be forced to enact school closures, business closures, etc, which will cause a massive demand shock.<p>3 - Demand shock will tank airlines, cruises, restaurants, malls, etc. Basically anything that requires groups of people to make money.<p>4 - Eventually, demand shock will hit corporate balance sheets in a big way. Many corporations (especially in the energy industry) are overloaded with debt [1]. If this goes on long enough, then those companies will go bankrupt.<p>5 - If enough companies default on their debt simultaneously, then derivatives on corporate debt (defaults) will cause a systemic crisis again [2].<p>There's no guarantee that this will happen, but if it does it's going to make 2008 look like a joke by comparison.<p>If it does, we need to do the right thing this time: wind down the banks and let them fail.<p>For the downvoters:<p>[1] <a href="https://www.nytimes.com/2018/09/01/opinion/the-next-financial-crisis-lurks-underground.html" rel="nofollow">https://www.nytimes.com/2018/09/01/opinion/the-next-financia...</a><p>[2] <a href="https://www.wsj.com/articles/in-a-blast-from-a-financial-crisis-past-synthetic-cdos-are-back-1503912601" rel="nofollow">https://www.wsj.com/articles/in-a-blast-from-a-financial-cri...</a>