Opinions are like noses: everyone has one and this one is mine. It’s official. The coronavirus has created complete chaos in our lives and the actions in Washington to combat it are literally creating a whole new “March madness” by the hour!
I try really hard to avoid putting my 2 cents (formerly 3 cents before I suffered the recent stock market losses) in this blog about politics. Occasionally it slips in, but that occurs only when I feel it’s necessary. Today, it’s necessary.
March Madness used to relate to college basketball, but now that this year’s tournament has been cancelled, the Fed has picked up the mantle and run with it. That’s why the Fed rate announced Sunday prior to the Federal Reserve Board meeting this week is the new March Madness!
Living with the Wild Anxiety of COVID-19
Chaos, anxiety, and distress about the spread of the coronavirus not only have most of us in fear of getting sick or even worse, but they also have injected the virus into Wall Street. Last week the Dow was in the midst of its worst results in its 124-year history. Now, the U.S. economy is expected to contract further in the wake of the new European travel ban, suspension of professional sporting activities, and shutdown of schools and so many other places and activities. Travel and the attached airline and hotel industries are expected to face their worst year in terms of revenues, amid massive restrictions and fears.
Needless to say, the deadly virus is expected also to weigh heavily on corporate profits (at least in the second quarter of 2020 and likely beyond) and disrupt supply chains across the world. But let me make this perfectly clear. This horrible situation is not primarily a financial issue.
Sunday, the President Told Us How “Very Happy” the Rate Cut Made Him!
COVID-19 is just a part of the mounting crises we are all facing. Economic crises are another fear and part of what is happening. But when all of us are sitting at home wondering how our lives are going to be affected and when this nightmare will end, we all had to watch a gleeful Trump discuss an interest rate cut that he has been pushing for years and now during this crisis he will get.
The Fed has the power to cut interest rates and Sunday afternoon it announced—in a rare inter-meeting move—that it has trimmed its interest rates to a range of 0-0.25%. In fact, the last time the Fed cut rates to that level on an emergency basis was in December 2008 during the financial crisis.
This cut is further aimed at thwarting the coronavirus threat to the economy by lowering borrowing costs for the second time in just a few days. The Fed also pumped trillions into the financial markets which it hopes helps the broader stock market.
“Happy” Is Not the Word I Use to Describe Interest Rates
For over the past three years, President Trump has tried to push, influence, and even bully the Fed and its chairman (his own appointee) to bend to his will of lowering rates to push the markets higher.
Chairman Powell has tried to let the markets move without letting the president’s verbal demands actually take place. Prior to the virus hitting the world’s economies, everything seemed to be sailing right along. Our markets have broken every all-time record and inflation remains low while employment remains high. It was a great tower of cards and we all knew that at some point that tower could and would fall, and that time is now.
Lack of Leadership
The Fed rate actions to cut rates effectively to zero pleases Trump. He actually wants interest rates to go beyond that and become negative, rates that have never existed here in the US. Why? What is happening here right now is not a financial crisis; it is a health crisis that has some economic effects. There is a leadership crisis and a priority crisis…that is evident.
Primarily our president sees what is happening right now more as a threat to our economy and his re-election than he does to human life!
Despite the fact that the U.S. infection and death rate is climbing daily and his own experts are projecting it to get worse before it gets better, he seems to be putting the economic threat to his re-electability before everything else.
Manipulating the Stock Market Is Dangerous
As president of the United States, Trump feels he has the ability to cause investors to make or lose millions—if not billions—of dollars in just a few minutes. All he has to do is tweet something positive or negative about his economic policy, especially if it is about tariffs, and the market almost always reacts.
He has even gone steps further by literally commenting on specific Fed policy and its actions, and criticizing it and Chairman Jerome Powell, as if Trump had some inside wisdom that the board and expert economy students didn’t have. He chides them unmercifully almost weekly these days. Unprecedented presidential action to say the very least!
Manipulating the stock market isn’t an economic plan and the Fed is not going to cure the virus!
What Will Happen Now? Recession?
Will we have a recession? That word hasn’t been in our vocabulary for over a decade now. The Fed policymakers’ actions Sunday shows how much they have accepted the research and the President’s predictions that once its benchmark rate approaches zero, it will produce great economic benefits. Because it takes time for rate cuts to work their way through the economy, if a recession threatens, quicker action is an effective tool.
But this isn’t just about interest rates and how they will change the economic picture. Right now, schools are closing, businesses are closing, and people are hunkering down and self-quarantining themselves and the end of it all is not in sight.
What Does the Interest Rate Change Mean?
Lower interest rates can bring on serious consequences. Low rates discourage people from saving, since banks slash the amount of money they pay on deposit accounts as interest rates tumble. That would hurt seniors and anyone who has more of their retirement savings in supposedly safer bonds or cash. The brokerage industry and financial firms would be hurt too.
Earnings estimates for large regional banks will plummet as interest rates fall. That’s because these banks won’t be able to make as much money from loans in a lower (or negative) rate environment.
But more significantly, when interest rates are slashed like this, savers are punished through the loss of a weakened dollar and the loss of buying power.
Pluses of the rate drop? While it is true that credit card interest rates will probably drop, it isn’t going to be a panacea for debt. For example, a customer with a balance of $1,500 on a typical bank credit card right now will save about $2.30 a month interest on their monthly payments according to TD Bank.
Yes mortgage rates, already at or near record lows, will also drop and it may inspire you to refinance your loan or even buy a home for the first time, but the banking industry is already having a huge problem processing these activities and now it will just get even worse if the activity is spurred. And,how much of a difference will it really create for refinancing when interest rates have already been low for years?
The Goal of Zero and Below-Zero Rates
The goal of zero and below interest rates is to spur banks to lend more, jolt the economy, and encourage consumers and businesses to spend rather than save their money. Presumably, a bank would rather lend, even at a low interest rate, than pay to keep its money at the central bank. If rates go below zero, banks and investments like money market funds would likely charge consumers for their deposits. That could lead to a run on these funds, which are used to finance short-term commercial loans, potentially slowing the gears of the financial system. A below zero rate—which is still a possibility—would be even more scary.
Have Negative Rates Been Successful in Other Countries?
Negative interest rates have stimulated some additional lending, largely on margins in other countries that have experienced recessions, while we have not gotten there since the 2008 debacle.
That resulted in other benefits that indirectly boosted their economic growth, such as lowering the cost of government debt and devaluing a country’s currency, which makes its exports less expensive overseas.
At the same time, negative rates further squeeze bank profits, making them less likely to lend in some cases. They also drive investments to other assets such as gold and commercial real estate. Does that sound like it just might be of interest to someone we all know?
And that kind of activity can also lead to huge bubbles in the real estate market and we have seen that bubble pop, haven’t we, just a few years ago!
I am not an economist, nor am I a doctor. But one thing I am is rational, and rationality tells me that we should place a lot more concern about our health and well-being on our family and friends waaaaay before we think about the economy and interest rates.
Perhaps our president is “very happy” about what the Fed is doing and perhaps he will become wealthier and pump up the economy and get re-elected because of it. For me though, it exposes him as someone who just doesn’t get it. It’s not the first case when that has been exposed, but it might just be the worst case.
Please be very careful, stay home if you can, and stay safe and healthy. For more information on the COVID-19 coronavirus and how to protect yourself and others, see the CDC website and the WHO website.