For days, the markets begged the Federal Reserve to cut interest rates, to stanch the bleeding stemming from the coronavirus outbreak.
Last Tuesday, the Federal Reserve delivered. And the stock market immediately went into a tizzy, gyrating well over 1,000 Dow points, with most of those dazed dance steps well in negative territory.
OK, the markets’ reaction probably was exaggerated in substantial part because they had set record increases just the day before, following historic declines over the preceding week. Buy on the rumor in a frenzy, sell on the news in a deep funk, perhaps. Or maybe the Monday gains were just a reflex bounce from so much lost altitude over such a little time before, with the next day preordained to fall further.
Or perhaps the markets got what they implicitly asked for. They demanded in the strongest language that the Fed move big and fast. So the Fed did two extraordinary things. They moved outside of a regular Open Market Committee meeting, and they moved by 50 basis points, instead of the more-common 25 — both for the first time since the financial crisis.
Were the markets demanding urgency, or were they demanding panic? And what did they get? Apparently the markets believe they got the latter, although the request was delivered in near-panicked terms.
If there is a lesson to be learned here, it is that monetary policymakers need peace and quiet — even, and perhaps especially, in difficult times. If confronted with loud demands, the Fed will have a hard time showing the steady hand that markets really need if they are to maintain confidence and calm. Of course, the onset of a pandemic is not the easiest time for markets to avoid crowding around the Fed and issuing apparent demands with pushes and shoves. In such instances, the markets will get the kind of response that they so visibly ask for.
And in the coming months, it will be hard for the markets to show calm and confidence. The Fed will be confronted with a real challenge.
We do not yet know the true extent of the damage from the pandemic; we really don’t know just what the nature of the pandemic is. We know that the virus can incubate in and spread through people who are asymptomatic, and that it communicates easily. By now, it could be anywhere — or everywhere. We may know — subject to the accuracy of partially suppressed data — that this virus is not the most lethal in recent history, but that it is lethal enough to stoke popular fear and motivate quarantines and travel bans, including on the shipment of goods. Whether U.S. and other supply chains have enough redundancy to cope with the production interruptions that we have seen and are likely to see is unclear — which is a major reason for the panic and uncertainty in the markets.
And then there is the Federal Reserve’s reserves of ammunition. The Fed has only another hundred basis points to go before it hits the lower bound of zero on the federal funds rate. Submerging to negative rates is fraught with peril, and frankly in Europe has not worked very well. And going back to “quantitative easing” is also of questionable utility; the 10-year Treasury rate is already barely 1 percent. Just how much additional business investment or consumer big-ticket spending can we possibly expect?
And the Fed isn’t the only macroeconomic policymaker that is out of ammunition. This downturn is a much more natural task for fiscal policy than for monetary policy. But can Congress and the Administration credibly propose fiscal stimulus when the budget deficit and the public debt are already exploding?
The lesson here is: Don’t get to where we now are. Policymaking has been shortsighted and imprudent. We have allowed ourselves to drift to the edge of the map, and have no remaining maneuvering room. As the nation contemplates its way forward, normalizing our collective behavior should be top of mind.
Joseph Minarik is a senior vice president with the Committee for Economic Development of the Conference Board. He was the chief economist at the Office of Management and Budget under President Clinton and coauthor of “Sustaining Capitalism: Bipartisan Solutions to Restore Trust & Prosperity.”