The Federal Reserve on Tuesday cut interest rates by 50 basis points, citing rising coronavirus-related risks to economic activity. The Fed lowered its fed fund target rate range from between 1.5% and 1.75% to a new target range of between 1% and 1.25%.
Markets initially popped on the news, but eventually took a big downturn with the Dow and S&P 500 both closing down about 3%. The Dow swung about 1,300 points Tuesday.
What The Experts Think About The Rate Cut
Tigress Financial's Ivan Feinseth believes the rate cut will be viewed negatively.
"While the markets knee-jerk reaction was to rally on the rate cut, the dramatic move this morning could be viewed as panic and further make people feel that the coronavirus and its impact may be more than originally expected," Feinseth told Benzinga in an email.
Independent Advisor Alliance Chief Investment Officer Chris Zaccarelli believes the Federal Reserve is reacting to the coronavirus outbreak in desperate measures.
"Clearly the Fed can't develop a cure or vaccine for the COVID-19 outbreak, so they are reacting to the upcoming threat to economic activity in the only way they know how – by targeting monetary policy," Zaccarelli said.
GLJ Research's Gordon Johnson believes this is very "dangerous" and the Fed reacted without knowing what the full impact of the coronavirus will have on the U.S. market.
"The point is… they are engaging in very aggressive monetary policy on a proactive basis, when these tools are supposed to be used only on an emergency reactionary basis. The danger is they lose control of the narrative, rendering their tools increasingly useless in the face of a real crisis emerging," Johnson told Benzinga.
Allianz Investment Management's Senior Investment Strategist Charlie Ripley believes the Fed's decision strays from the Fed commentary last week.
"Overall, it appears the Fed has gone down the path of taking out more insurance from market risks in the form of rate cuts in order to keep extending the current economic expansion," Ripley said.
Bahnsen Group Chief Investment Officer David Bahnsen believes "the Fed cut was fully baked in (and then some) to Fed funds futures for the March 17 FOMC meeting so it happening two weeks early is not a huge deal to markets, hence the 200 points up move and 200 points down move on the Dow."
What They Believe Will Happen To The Market
"[H]istory has shown that these negative epidemic related impacts to stocks do correct themselves," Feinseth said.
Zaccarelli said there are two potential ways this rate cut will play out:
- The COVID-19 outbreak will be bad "and this action will be viewed as necessary and appropriate as the economy attempts to weather the upcoming demand shock."
- This "will prove to be less of a threat to the U.S. economy than is currently feared, and this action may ultimately be judged to be the cause of an equity melt-up fueled by too-low interest rates, analogous to the one of the late 1990s."
Johnson believes history will repeat itself with unreasonable monetary policy leading to a disaster.
"We've seen this done in Japan in the 1980s, which lead to the lost decade in the 1990s; done in Germany in the early 1900s, which lead to hyperinflation in Germany in 1921 and 1923; Zimbabwe in the 1990s, leading to hyperinflation," Johnson said.
Bahnsen believes the Fed will continue to cut rates throughout the year and expects Fed funds rate of 0-50 basis points by the end of the year.
"This enhances equity risk premium but does little to stimulate the real economy," he said. "Rinse and repeat."