The Federal Reserve is under pressure from Wall Street to cut interest rates as the financial sector braces for the unknown economic toll of the coronavirus and after markets suffered a weeklong free fall.
Federal Reserve Chairman Jerome Powell said in a Friday statement that the central bank “will use our tools and act as appropriate” to protect the economy, evoking the Fed’s 2019 pledge to cut interest rates across three consecutive meetings.
Those comments helped Wall Street curb its losses after the worst week of stock losses since the 2008 financial crisis, with all three major stock indexes plunging into a correction.
By the end of Monday trading, the Dow Jones Industrial Average had gained 1,296 points, rising 5.1 percent for its best day since 2018. The Nasdaq composite and S&P 500 index boasted spikes of 4.5 and 4.6 percent respectively.
Traders are betting on the Fed to cut rates even before the next formal policy meeting later this month, pushing the central bank to shift course on rates to soothe financial markets.
The Fed can also expect steady pressure from President Trump, who has extended his frequent calls for lower interest rates as his administration responds to the public health emergency.
“As usual, Jay Powell and the Federal Reserve are slow to act. Germany and others are pumping money into their economies. Other Central Banks are much more aggressive,” Trump tweeted Monday. “The U.S. should have, for all of the right reasons, the lowest Rate. We don’t, putting us at a competitive disadvantage. We should be leading, not following!”
But there are also open questions about the Fed’s ability to protect the broader economy from the coronavirus fallout.
While the Fed appears poised to protect Wall Street from a deeper rout, analysts say a cut to interest rates that are already near record lows may not be enough to fend off the virus’s most pressing threats to the economy.
“Saving the market won’t save the world,” wrote Karen Shaw Petrou, managing partner at Federal Financial Analytics, in a Friday research note.
Such a move “only reinforces the Fed’s role as the equity market’s savior, driving the Fed still deeper into an ultra-low rate hole from which it can’t extricate itself no matter the long-term damage to growth and economic equality,” she continued.
Powell has faced consistent pressure from Trump and Wall Street to ease interest rates since taking over as Fed chairman in February 2018. Both have counted on the Fed to maintain low interest rates amid a record rally for U.S. equity markets, then to cut in times of anxiety.
The Fed has also heeded the calls of left-leaning economists who argue that lower rates would help the labor force draw millions of new workers into a slowing economy. Until last week, Fed officials touted their confidence in the current interest rate range — low enough to spur job growth and inflation while high enough to leave room to respond in a crisis.
Two weeks later, stocks plunged as public health officials warned of an inevitable coronavirus outbreak in the U.S. and traders grappled with the economic consequences. Futures markets now show Wall Street banking on the Fed to cut the baseline interest rate range of 1.5 to 1.75 percent by 50 basis points, twice the typical size of a rate adjustment.
Cutting rates may help curb some of the financial volatility that has wracked Wall Street since a coronavirus spread within the U.S. became inevitable.
“The impulse is so strong among policymakers to prevent any kind of an economic downturn that they would rather use up the final bullets in their chamber to prevent the ire of a recession,” said Peter Cecchini, chief market strategist at investment firm Cantor Fitzgerald.
“The Fed is a bit on its heels and now the coronavirus has it even more on its heels.”
Even so, reductions in borrowing costs are meant to spur investments such as business expansions, capital investments and start-ups that could take months to make a wave in the consumer economy.
The coronavirus also poses deeper threats beyond reducing demand that experts say do not respond to monetary adjustment, such as widespread supply disruption.
If businesses and manufacturers lack the sufficient materials or workers to satisfy demand, lower interest rates may not help. Factories in China were shuttered for weeks, and American companies from the tech to the auto sector have warned of supply chain shortfalls.
“The whole idea of that having an effect on the general economy is ridiculous,” said Daniel Alpert, managing partner at investment firm Westwood Capital.
“Monetary policy is supposed to spur capital investment,” continued Alpert, who supports cutting interest rates for reasons unrelated to the virus. “None of this is going to happen.”
Alpert and Cecchini also argued that stocks were long due for a decline after years of gains they say were fueled by little more than easy Fed interest rates and momentum.
The Dow, S&P and Nasdaq all notched record highs in the months leading into the coronavirus rout despite a slowdown in global growth and the early signs of economic trouble in China over the disease.
“It had become more of a casino than ever before,” Alpert said Monday. “This is a market that was horribly overvalued.”