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article imageOp-Ed: Should the Fed save Wall Street during COVID-19 outbreak?

By Karen Graham     Mar 1, 2020 in Business
As stocks around the world tumbled on worries about a fast-spreading virus, investors have been clamoring for the superheroes of the financial world to ride to the rescue once again. But can central banks fix this crisis?
History shows us what happened during the financial crisis of 2007-08. To avoid a damaging recession, the Federal Reserve lowered the Federal funds rate 11 times - from 6.5% in May 2000 to 1.75% in December 2001 - creating a flood of liquidity in the economy.
And cheap money always rises to the top - making it easy prey to restless bankers—and even more restless borrowers who had no income, no job, and no assets. In June 2003, the Fed lowered interest rates to 1 percent, the lowest rate in 45 years.
It turned the financial market into a huge candy shop, with plenty of lollipops for everyone. Trouble was - no one said too much candy would give you a bellyache. And it did get worse, globally. The financial crisis of 2007-08 has taught us that the confidence of the financial market, once shattered, can't be quickly restored.
Pedestrians wearing face masks against the spread of the coronavirus spotted on a street in Tokyo
Pedestrians wearing face masks against the spread of the coronavirus spotted on a street in Tokyo
Philip FONG, AFP
It is different today
In the United States, we have seen nearly four years of economic growth and a dramatic lowering of the unemployment rate, so it is not a recession we are coping with. The culprit this time could be a once-in-a-lifetime pandemic.
In an opinion piece in the New England Journal of Medicine on Friday, Microsoft co-founder Bill Gates said the outbreak could be a once-in-a-century pandemic. “The data so far suggest that the virus has a case fatality risk around 3 percent; this rate would make it many times more severe than typical seasonal influenza, putting it somewhere between the 1957 influenza pandemic (0.6 percent) and the 1918 influenza pandemic (2 percent),” he wrote, according to Market Watch.
The damage to Wall Street and other financial markets around the world was undeniably dramatic this past week. Standard & Poor’s 500 stock index plummeted 12.8 percent, the biggest such fall since the 2008 financial crisis. The Dow Jones Industrial Average and the NASDAQ Composite plunged along with the S&P 500.
All totaled, global equity markets wiped have wiped out $7 trillion since February 19, 2020. This leaves many investors with the question - What to do? The Associated Press is reporting that investors are calling for the Fed to swoop in yet again with rate cuts and perhaps other stimulative actions in order to save the market.
Tourism in Italy has taken a hit due to the coronavirus outbreak
Tourism in Italy has taken a hit due to the coronavirus outbreak
Miguel MEDINA, AFP
Cutting the rates may not be a good idea
“We need the Fed to come out and say, basically, ‘Guys, we got your back,’” said Gene Goldman, chief investment officer at Cetera Financial Group. Traders are basically betting with 100 percent certainty that the Fed will cut interest rates at its next meeting on March 18.
The thing is - the Fed raised rates four times in 2018, only to cut them three times in 2019, all to help put the S&P 500 into one of its most dazzling years in decades — a 31.5 percent return. And the Federal Reserve would be overstepping its mandate to maximize employment and keep prices stable. The Fed is not the personal banker of Wall Street, and bailing them out in this particular situation may very well not work.
“It’s dangerous when the expectation is 100% that we’re going to get a cut,” said Ann Miletti, head of active equity at Wells Fargo Asset Management. “When expectations get disjointed from reality, that gets problematic.”
Iran's deputy health minister (L)  who has tested positive for the novel coronavirus  coughed a...
Iran's deputy health minister (L), who has tested positive for the novel coronavirus, coughed and wiped sweat from his brow during a press conference in Tehran on Monday with government spokesman Ali Rabiei
-, Iranian Presidency/AFP
So why is this a problematic situation? Think about it for a minute. While lowering rates will make money more available for businesses and consumers, sick people won't be able to take advantage of this, nor will factories closed down because half of their employees are at home because of quarantines.
Lowering the rates will not help to restart supply chains in areas of the world struck by the outbreak. Keep in mind that we are talking about a global health crisis, and with our interconnected economies, it is not the same as a recession. And last, but not least is the fact that the Federal Reserve has a benchmark short-term rate in a range of 1.50 percent to 1.75 percent, down from the high of 5.25 percent before the Great Recession.
This means the Fed doesn't have all that much monetary firepower to do much good. Bottom line? We will have to wait this virus out.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
More about Covid19, Stock market, Federal reserve, Bailout, risk assets
 
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