After last week’s not one but two Bloomberg op-eds by the Fed’s biggest ever dove, Narayana Kocherlakota, in which the former Minneapolis Fed president advocated not just a rate cut, but an emergency intermeeting rate cut, we said that with the idea now “incepted”, it was only a matter of time before officials took it on as their own.
And sure enough, with the market now holding the Fed hostage and – in agreement with both Goldman and Bank of America – pricing in not just one but two rate cuts on or before March 18 as if the global economy is on the verge of a depression, moments ago Bloomberg reported that as part of the Trump administration’s idea to contain the economic and market fallout from the rapidly spreading coronavirus, because somehow printing more money will help thousands of sick Americans defeat the deadly virus, the two most important people in Trump’s advisory orbit, National Economic Council director Larry Kudlow, and Treasury Secretary Steven Mnuchin, both favor the Fed cutting interest rates before its next scheduled meeting on March 17 and 18. As Bloomberg further adds, within the White House, a rate cut is currently the most actively discussed economic measure to combat the virus, the people said.
To the White House’s chagrin, however, the market was hardly excited by this incremental update-cum-trial balloon, because traders have already priced in not just one but two emergency rate cuts, and as such what the White House is proposing is not incremental.
Worse, it suggests that some of the various fiscal stimuli that had been floated including payroll tax cuts, or even Hong Kong-style money paradrops are not being discussed, and that once again it is up to Powell to bailout permabuls.
Which also is not news: on Friday, Fed Chair Jerome Powell already signaled the central bank is open to a rate cut, in a rare statement on Friday before markets closed. Powell said the coronavirus “poses evolving risks to economic activity,” and that the central bank will “use our tools and act as appropriate to support the economy.”
Meanwhile, on Monday, after Powell failed to act over the weekend, the president made plain his feelings about the independent central bank on Monday, tweeting that Powell has been “slow to act.” Naturally, even that is not new, with Trump frequently criticizing Powell for not being dovish enough, and has urged the Fed to cut rates below zero even before the coronavirus outbreak.
Which is why the real news reported by Bloomberg, and which is hardly risk-asset positive, is that within the White House, there have also been discussions of an economic stimulus package that would likely be heavily weighted toward tax cuts, but it’s not under serious consideration.
This means that unlike countries like Italy, which over the weekend promised a $4 billion package including tax credits and liquidity support for businesses, and China whose regulators announced a waiver for small companies struggling to repay loans, Trump plans on leaning on the Fed to prevent a recession.
Which begs the question: what can the Fed actually do to restore an economy that is crippled by fear of pandemic, and since it can’t print antibodies, will the Fed merely spike stocks briefly, only to see them tumble in coming days when the pandemic gets even worse and the disconnect between the economy and markets is back to the widest it has ever been.
That said, there is yet hope on the fiscal side: as Bloomberg reported earlier, Mnuchin and his G-7 counterparts are holding a phone call on Tuesday to discuss coordinating responses to the economic threat of coronavirus, a report which helped kick start today’s monster rally, which however will hardly last.