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Is a Fed Rate Cut Useful?

Terry H. Schwadron

March 7, 2020

To my ear, the emergency Federal Reserve rate cut this week, lowering the basic cost of corporate borrowing by a half a percentage point — a large cut by these standards — has more a whiff of desperation and partisan politics than it does a boost to the national economy.

I understand that economists and business leaders have warned that growth this year is expected to slow, potentially sending some countries a recession if world leaders do not act. And that all of this has been brought into sharper focus as a result of business disruptions caused by fears of coronavirus.

We all can agree that some straight talk about illness and treatments, including vaccines, would do a lot more for tanking, or at least volatile financial markets, than an adjustment of rate cuts. Financial rates don’t cure illness.

In any event, the markets did not respond well, with values continuing to fall in all markets.

So, the first question is what problem was the Fed, under enormous pressure from Donald Trump and his reelection hopes, is trying to solve. Indeed, Trump complained that the cut was not big enough. That response would seem to be something that Business can focus on in place of disrupted manufacturing supply lines and a mess of a travel industry.

But, from all that I can tell from various readings, borrowing towards future investment has little to do with addressing consumer confidence and consumer spending right now. Put baldly, with fear, fewer consumers go out to shop, and spend more time at home. Thus, airlines, travel and tourism, and all kinds of supply lines that reach to China and Italy, among other nations, will suffer — mostly because, well, our financial markets cannot stand to lose profits even for a quarter, while America and other nations actually worry their way through an actual medical problem.

What I’ve been missing is a strong message from Donald Trump or even Democratic candidates (Bernie, where are you?) that corporations should suck it up for the moment and let the nation find its public health balance before we worry about whose profits are going to dip for a couple of months.

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Fed Chair Jerome H. Powell said the Fed was acting to protect the U.S. economy and financial markets. “We saw a risk to the outlook of the economy and we chose to act,” Powell said. He added that the Fed can’t come up with a vaccine or fix a broken supply chain that’s disrupted by the outbreak in China, but believes the rate cut will help protect the economy from a downturn.

The cut in national interest rated to just below 1.25 percent from 1.75 percent, with hints of more, came as Trump has renewed longstanding calls for a big rate cut. Again, to my ear, this was Trump using a national crisis for financials he does not control to produce results that will help his reelection.

Markets have not found the move particularly calming, of course, as efforts are under way to determine how deep and long effects of coronavirus might be. Uncertainty is a bigger driver for volatility than rates, it would seem.

News reports noted that the last time the Fed made such a move was during the 2008 financial crisis.

Naturally, these news analyses note that interest rates are already very low and any future corporate borrowing remains outside immediate consumer behavior at a time when there are virtually daily announcements about expanding illnesses in the United States and elsewhere. Likewise, cutting taxes is also unlikely to boost production if manufacturers can’t get the parts they need.

And, that these truths hold not just for the United States but internationally.

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As a startling corollary, the Supreme Court has agreed to a third hearing on the constitutionality of the Affordable Care Act. While the case is unlikely to be argued until after November’s elections, the idea that the nation’s health system could be declared unlawful entirely ought to be worrying Wall Street, businesses and the entire country a lot more than a quarter of reduced profits.

The Trump administration and Justice Department, obsessed as they are with overturning Obama-era achievements, have placed fighting Obamacare and working aggressively to undercut the law above dealing directly with any public health emergency.

Trump had dismissed his White House pandemic coordination team, and proposed substantial fund cuts to the Centers for Disease Control and the National Institute of Health. He has bragged at his campaign rallies about non-existent health plans with non-existent patient protections while attacking Democrats for actual ideas to expand health care.

Trump also called for a one-year reduction in payroll taxes, which would be an immediate boost to the paychecks of working Americans. Payroll taxes are used to fund Social Security and Medicare and have been reduced in past times of economic trouble, including after the financial crisis.

But he also has proposed cuts in Social Security, Medicare and Medicaid. And he is silent about corporate resistance to offering sick leave to workers.

If the business community wants action that addresses widespread health effects that may affect the availability of workers, transportation, and well-being, there are plenty of targets that have nothing to do with federal interest rates.

Let’s keep our eye on the ball, please.

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www.terryschwadron.wordpress.com

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Journalist, musician, community volunteer

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