Fear at the Fed

Posted by: Paul Donovan

04 Mar 2020
  • The economic impact of the coronavirus has always been about fear of the virus. Fear changes consumer behavior. Fear changes policy-makers' behavior. Yesterday, fear reached the US Federal Reserve, which cut US interest rates by 0.5ppt. This may reflect some weakness of economic leadership at the Fed.
  • A rate cut is an easily tweetable policy move, but it is a blunt policy move. Businesses need help to overcome short-term cash-flow problems. Standing on the roof of the Federal Reserve building and showering passers-by with rate cuts may achieve that, but it is imprecise.
  • When will the Fed raise rates? If Fed Chair Powell's rather vague justification is taken at face value, rate hikes should happen when the virus fades. Markets are not assuming that. South Korea is targeting fiscal stimulus at businesses. The Bank of England's Carney is encouraging banks to help with companies' working capital.
  • Former Vice-President Biden performed strongly in the US Democratic Party's "Super Tuesday" primaries. Senator Sanders won California. US futures have reacted positively. Assorted global business sentiment opinion polls are due. Markets are hungry for any information, but these tend towards opinion influenced by the dominant narrative of the media cycle, not objective fact.

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