Via Economic Policy Journal

Federal Reserve Bank Building, Washington D.C.

In an emergency meeting on Tuesday, the  Federal Reserve cut the target rate on the Fed funds interest rate by 50 basis points to the new range of 1.00% to 1.25%.

Now Wall Street Journal reporter Nick Timiraos, who covers the Federal Reserve for the paper, writes that “The three main reasons behind the Federal Reserve’s interest rate cuts on Tuesday help explain why the central bank is likely to lower rates again.”

Presumably, Timiraos wrote his article with some guidance from the Fed.

Timiraos continued in his report:

The Fed hoped to boost public confidence, prevent financial conditions from worsening and cushion the U.S. economy against a global growth downturn.

While the rate cut may help on each of those fronts, the outlook could grow darker in the weeks ahead as the number of U.S. coronavirus cases rises.

The rate cut Tuesday came between the Fed’s regularly scheduled policy meetings, illustrating urgency to get ahead of an unfolding shock, even if the underlying nature of the threat isn’t economic…

Any good economic data released in coming weeks can be easily dismissed because they will show how the economy fared prior to the spread of the virus. And more bad news seems likely.

Confidence could falter as health authorities test more widely for the infection, revealing how far it has spread and possibly prompting school closures and remote work arrangements.

“The effects are at a very early stage,” said [Fed chairman Jay] Powell, referring to increasingly negative sentiment from travel and hospitality businesses. “We expect that will continue. It will probably grow.”

The same dynamic could weigh on financial markets. Measures to contain and mitigate the damage could force companies to lower their earnings forecasts and weigh on stock and corporate-bond markets…

Mr. Powell said the Fed was prepared for a possible increase in corporate defaults or business failures. “We don’t see any of that happening yet. Of course, we are thinking about what we can do, should those things happen,” he said.

Finally, the U.S. economy faces disrupted supply chains and weaker global economic activity. This downturn could deepen if policy makers abroad aren’t able or willing to spur growth. Interest rates are already low and many central banks don’t have the wherewithal to reduce them much further.

As I have previously written, it never makes sense to manipulate interest rates and certainly not to attempt to ward off concerns about a virus. Money supply growth has been extraordinarily strong in recent months and this Fed action will result in even stronger money growth—which will add to the upward pressure on prices that has already been slowly developing.

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In the EPJ Daily Alert, I advise that a potential for a rapid acceleration in price inflation is now stronger than ever because of these Fed actions. Price inflation, as measured by government indicators, could now be at 5% or higher by the end of the year.

The next regularly scheduled meeting of the Federal Open Market Committee, the Fed’s monetary policy-setting group, is  March 17 to 18 with a policy statement scheduled to be released at 2:00 PM ET on Wednesday the 18th.

RW