Our gut feeling when we heard today’s big news from the Fed was that it looked a bit panicky. Grandmaster Jay’s post-cut presser did little to persuade us otherwise.
To give him credit, the Fed chair was pretty clear that the cut was no panacea. First and foremost, the scale of the shock from the coronavirus outbreak would depend upon the work now being done by healthcare professionals. Fiscal policy also had an important role to play. He noted, too, that the US economy was reasonably strong and would bounce back, however long coronavirus stuck around.
Still we’re just not sure he convinced us that it was worth making a 50 basis point cut for the first time since 2009 (and the first move outside of the normal meeting schedule since 2008) right now.
The FOMC’s thinking was that it was necessary to do something preemptive to avoid a tightening in financing conditions. The Fed chair also cited indicators that parts of the tourism industry, such as hotels, were beginning to feel the impact of the outbreak.
He seemed confident the cut would help such sectors by shoring up business and consumer sentiment. But we don’t buy the reasoning here. Is it logical to think that the Fed’s move will lead to a wave of hotel bookings? Is that even desirable right now? The only line of thinking we can see is that cutting borrowing costs will lead to a bigger surge in demand once the panic wanes.
We did like the sound of the answer he gave to a question from the Washington Post on whether the Fed would consider offering relief to businesses suffering severe slumps in demand. He made clear that the Fed and other supervisors were willing to talk to the banks about going easy on businesses that are acutely hit by the economic impact of the virus.
There’s one other aspect of the press conference that we think’s worth mentioning. He was rather optimistic on joint action by global economic officialdom. We’re not sure what shape this coordination would take, but when asked he seemed more bullish than those of us who read the G7 statement from earlier this afternoon might have imagined.