President Donald Trump called on the Federal Reserve to slash interest rates even further after the central bank’s Tuesday announcement of an emergency cut of 50 basis points was met with a bland reaction by Wall Street, as investors worried the shock cut might not be enough to shield the world’s largest economy from the impact of the epidemic.
“The Federal Reserve is cutting but must further ease and, most importantly, come into line with other countries/competitors,” Trump wrote on Twitter. “It is finally time for the Federal Reserve to LEAD. More easing and cutting!”
The Federal Reserve is cutting but must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!
— Donald J. Trump (@realDonaldTrump) March 3, 2020
Markets spiked Monday amid mounting expectations of an emergency cut by the Fed and on declarations by G7 countries that they would coordinate a policy response to the coronavirus threat to world economies. The Dow Jones made its biggest-ever point gain yesterday, and Wall Street’s other main indexes also saw significant gains.
But after Federal Reserve Chairman Jerome Powell announced Tuesday that the central bank’s new target range for the benchmark Federal Funds rate would fall by half a percentage point to between 1 and 1.25 percent, the main stock market indexes inched lower in volatile trading, while low-risk assets like bonds rallied.
Investors continued to favor safe-havens intraday, with prices of Treasuries climbing, pressing yields lower. Bond yields go down as prices go up, and are a sign of investors seeking safety.
The 10-year U.S. Treasury note tested a historic new low intraday and at 12:11 EST was down by 9.68 percent. The 30-year U.S. Treasury bond was down 4.3 percent shortly after.
The Fed’s half-point cut is the biggest in more than a decade and initially prompted a jump on the major stock indexes.
But they quickly turned negative before settling between flat and 0.2 percent lower as analysts and traders worried whether pumping more money into banks and financial markets may not address the central problem of the epidemic—a cut in business activity as workers and consumers stay home.
“The Fed cutting rates by 50 basis points now is not going to get people to go to the movies or to conferences, sporting events or any large gatherings,” said Michael O’Rourke, a strategist with Jones Trading in Stamford, Connecticut.
Others blamed the tepid G7 statement, which included a pledge to use “all appropriate tools” to deal with the spreading coronavirus but announced no immediate actions.
“The G7 statement earlier today was certainly underwhelming and disappointed many investors,” said Robert Johnson, professor of Finance at Heider College of Business at Creighton University. “The Federal Reserve stepped in and made it clear that it was cutting rates to provide a meaningful boost to the economy, and will continue to do so if the economic situation warrants,” he told The Epoch Times by correspondence.
“It is certainly true that rate cuts will not provide a cure for the coronavirus,” he added. “But rate cuts will help bolster the financial markets and through the wealth effect will help the underlying economy weather the (hopefully) short-term disruption caused by the coronavirus.”
Allen Sukholitsky, chief macro strategist at Xallarap Advisory, told the Epoch Times in an emailed statement that markets are not convinced by the Fed’s emergency cut because the underlying economic data suggests the U.S. economy is in reasonably good shape, sparking investor speculation that the Fed is acting on information that the epidemic is worse than it appears.
“No economic data released over the last week would justify an unscheduled rate cut, let alone the largest rate cut since the financial crisis,” Sukholitsky said. “The proximate driver was the S&P 500, which experienced a correction, albeit one that was well within historical averages. Equities are now in the red because they sense inconsistency between this rate cut and the Fed’s statement that ‘fundamentals of the U.S. economy remain strong.'”
The U.S. central bank cut rates three times in 2019 and has since been on pause amid signs of improving growth after the United States and China signed a “Phase One” trade deal in January.
“Quite stunning for today’s move, but appropriate,” said Scott Krase, CEO at CrossPoint Wealth. “Travel plans are being cancelled for individuals and businesses which is killing the travel industry.”
“The rate cut will not help with the supply chain, but will help with household and business confidence,” Krase told The Epoch Times in a statement.
The Fed’s rate-setting body is scheduled to meet March 17-18, where it will again weigh economic factors and decide whether to hike, hold, or cut rates.