What if Fed cut doesn't work?

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JoeRetire
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What if Fed cut doesn't work?

Post by JoeRetire » Tue Mar 03, 2020 10:11 am

So the Fed just cut rates by 50 bps.

What is it doesn't work? What's next?
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Tim_in_GA
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Re: What if Fed cut doesn't work?

Post by Tim_in_GA » Tue Mar 03, 2020 10:15 am

Then the "U.S. stocks in free fall" thread gets even more active.

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Re: What if Fed cut doesn't work?

Post by Trader Joe » Tue Mar 03, 2020 10:20 am

JoeRetire wrote:
Tue Mar 03, 2020 10:11 am
So the Fed just cut rates by 50 bps.

What is it doesn't work? What's next?
I recommend that you tune out the noise and stay the course.

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JoeRetire
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Re: What if Fed cut doesn't work?

Post by JoeRetire » Tue Mar 03, 2020 10:21 am

Trader Joe wrote:
Tue Mar 03, 2020 10:20 am
JoeRetire wrote:
Tue Mar 03, 2020 10:11 am
So the Fed just cut rates by 50 bps.

What is it doesn't work? What's next?
I recommend that you tune out the noise and stay the course.
Thanks. I wasn't actually looking for a recommendation (I'm neither selling nor buying), just a prediction.
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Jags4186
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Re: What if Fed cut doesn't work?

Post by Jags4186 » Tue Mar 03, 2020 10:22 am

I fully expect the rate cut not to work as the corona virus risk is not reduced liquidity, it’s reduced raw materials from China. If our manufacturing sector can’t get the raw materials needed to make whatever they want, reduced interest rates will not help alleviate that problem.

There does not seem to be anything that the Federal Reserve can do about this.

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Re: What if Fed cut doesn't work?

Post by corn18 » Tue Mar 03, 2020 10:24 am

Why would it work? I can't even guess what relationship the Fed funds rate has to do with the corona virus other than the emotional side of the market. I'll take it though because we are waiting to lock in a mortgage on our new house. I was just going to pay cash but jeesh, if they hit 2.75% for 30 year fixed, I may have to reconsider.
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Re: What if Fed cut doesn't work?

Post by Dottie57 » Tue Mar 03, 2020 10:28 am

JoeRetire wrote:
Tue Mar 03, 2020 10:11 am
So the Fed just cut rates by 50 bps.

What is it doesn't work? What's next?
Why in the world will it work? If workers are sick, how will a cut in Fed rates help - the virus, economy, market?

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SteelyEyed
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Re: What if Fed cut doesn't work?

Post by SteelyEyed » Tue Mar 03, 2020 10:28 am

COVID-19 has mutated into COVID-19.1, which is a Fed Funds Rate Cut-immune strain of the coronavirus.

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Re: What if Fed cut doesn't work?

Post by JoeRetire » Tue Mar 03, 2020 10:29 am

Dottie57 wrote:
Tue Mar 03, 2020 10:28 am
JoeRetire wrote:
Tue Mar 03, 2020 10:11 am
So the Fed just cut rates by 50 bps.

What is it doesn't work? What's next?
Why in the world will it work? If workers are sick, how will a cut in Fed rates help - the virus, economy, market?
Because a little push from rate cuts almost always gooses the market. At least temporarily.
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Re: What if Fed cut doesn't work?

Post by Watty » Tue Mar 03, 2020 10:31 am

What if Fed cut doesn't work?
To know if it "worked" or not you have to define what it is intended to do and that is unclear to me.

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Re: What if Fed cut doesn't work?

Post by UpsetRaptor » Tue Mar 03, 2020 10:38 am

I predict it will work. Though I define work as "make it viable for me personally to refi my mortgage in the near future". Others may differ.

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greg24
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Re: What if Fed cut doesn't work?

Post by greg24 » Tue Mar 03, 2020 10:39 am

The move seems kind of dumb. A half point rate cut at this moment in time won't magically fix everything.

But it is one less bullet in their pocket for the future. Two bullets if you want two quarter point cuts.

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Re: What if Fed cut doesn't work?

Post by Unladen_Swallow » Tue Mar 03, 2020 10:41 am

Then the BH panic threads will multiply. Doomsday scenarios galore.

Toilet paper will sell out.
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Re: What if Fed cut doesn't work?

Post by Dottie57 » Tue Mar 03, 2020 10:43 am

greg24 wrote:
Tue Mar 03, 2020 10:39 am
The move seems kind of dumb. A half point rate cut at this moment in time won't magically fix everything.

But it is one less bullet in their pocket for the future. Two bullets if you want two quarter point cuts.
Exactly.

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Re: What if Fed cut doesn't work?

Post by anoop » Tue Mar 03, 2020 10:45 am

They can cut to zero.

They can cut below zero.

They can restart perpetual QE.

They can start buying equities outright.

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Re: What if Fed cut doesn't work?

Post by blackcat4 » Tue Mar 03, 2020 10:46 am

Does anyone else think it’s a bad sign for the market (short term) that not even an inter-meeting 50 basis point cut (not done since the Great Recession) can create a rally?

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Re: What if Fed cut doesn't work?

Post by strongboy2005 » Tue Mar 03, 2020 10:47 am

corn18 wrote:
Tue Mar 03, 2020 10:24 am
I'll take it though because we are waiting to lock in a mortgage on our new house. I was just going to pay cash but jeesh, if they hit 2.75% for 30 year fixed, I may have to reconsider.
I didn’t think the short term fed funds rate and 30 year mortgage rates were linked in any way.

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Re: What if Fed cut doesn't work?

Post by adamthesmythe » Tue Mar 03, 2020 10:48 am

I would like to join with others and agree that a rate cut won't fix things.

There are really two possibilities, pretty much independent of fiscal policy. Either the coronavirus isn't that bad, and we get back to normal after a bad quarter, or it's bad, and it takes much longer to get back to normal.

I am discounting the possibility of an end to civilization.

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Re: What if Fed cut doesn't work?

Post by DaftInvestor » Tue Mar 03, 2020 10:49 am

At one point the Mod's here stated that the "Soar" and "Free Fall" threads would be kept open for non-actionable discussions.
Now it seems not only do we have those two threads (which I agree are fun to use for non-actionable discussion) but many NEW non-actionable threads being opened daily. There were two on DCB speculation yesterday - seems like half the threads here on Bogleheads are now these non-actionable discussions. The OP here stated he wasn't taking action so why another non-actionable thread?
This place is getting out-of-control with speculators and worry-warts. :shock:

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Re: What if Fed cut doesn't work?

Post by Cousin Eddie » Tue Mar 03, 2020 10:54 am

To be contrarian, the fed is probably doing this to help prevent a general nationwide panic. Panic in the market can be self-sustaining even if it turns out to be nothing. If the coronavirus becomes a major pandemic killing millions of people I don't think anyone is going to tell the fed 'I told you so'.

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Re: What if Fed cut doesn't work?

Post by RubyTuesday » Tue Mar 03, 2020 10:57 am

It’s not like liquidity is the issue, or inflation, or employment. What’s the Fed’s justification? Seems like an emergency easing of 50bps when rates already so low could potential spook the markets.

And couldn’t this be interpreted by the world/market as the Fed succumbing to political influence?

Note to mods: I don’t intend the preceding sentence to be a political statement, just trying to imagine how the world/market would interpret lowering interest rates in the current environment. Please remove just the second paragraph if it violates the forum rules.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu

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Re: What if Fed cut doesn't work?

Post by anoop » Tue Mar 03, 2020 11:00 am

Cousin Eddie wrote:
Tue Mar 03, 2020 10:54 am
To be contrarian, the fed is probably doing this to help prevent a general nationwide panic. Panic in the market can be self-sustaining even if it turns out to be nothing. If the coronavirus becomes a major pandemic killing millions of people I don't think anyone is going to tell the fed 'I told you so'.
This is nothing short of panic at the fed.

We are headed to zero before the year is out.

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Re: What if Fed cut doesn't work?

Post by montanagirl » Tue Mar 03, 2020 11:00 am

There's still quantitative easing, which would pump more money to banks and corporations so they can do more stock buybacks.

Win-win! :moneybag

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Re: What if Fed cut doesn't work?

Post by quantAndHold » Tue Mar 03, 2020 11:01 am

I predict when it doesn’t work the Fed will cut rates again. And again. Then do QE.

Eventually people will get well, stuff will get made and bought again, and we’ll have too much money chasing too few investments.
Yes, I’m really that pedantic.

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Re: What if Fed cut doesn't work?

Post by rascott » Tue Mar 03, 2020 11:05 am

Needing to catch up with the bond market and the rest of the world. Yield curve had become seriously inverted.

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Re: What if Fed cut doesn't work?

Post by KlangFool » Tue Mar 03, 2020 11:08 am

OP,

It helps my bond index fund. So, it had worked. For those that think you cannot make money with the bond index fund, they were wrong.

KlangFool

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Re: What if Fed cut doesn't work?

Post by TheAccountant » Tue Mar 03, 2020 11:08 am

Sooner or later, the fed is going to learn that they can't keep slashing rates just to keep the economy afloat.

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Re: What if Fed cut doesn't work?

Post by JoeRetire » Tue Mar 03, 2020 11:12 am

greg24 wrote:
Tue Mar 03, 2020 10:39 am
The move seems kind of dumb. A half point rate cut at this moment in time won't magically fix everything.

But it is one less bullet in their pocket for the future. Two bullets if you want two quarter point cuts.
I'm guessing that magically fixing everything isn't the goal here. Still, there was a lot of pressure from above to cut the rates.
But I tend to agree, that using up these bullets now may not have been a great idea.
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Re: What if Fed cut doesn't work?

Post by JoeRetire » Tue Mar 03, 2020 11:13 am

Unladen_Swallow wrote:
Tue Mar 03, 2020 10:41 am
Then the BH panic threads will multiply. Doomsday scenarios galore.
Even worse than now? Yeesh!
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Re: What if Fed cut doesn't work?

Post by MathWizard » Tue Mar 03, 2020 11:14 am

greg24 wrote:
Tue Mar 03, 2020 10:39 am
The move seems kind of dumb. A half point rate cut at this moment in time won't magically fix everything.

But it is one less bullet in their pocket for the future. Two bullets if you want two quarter point cuts.
Agree.

This looks more like the Fed wanting to say that it did something. It does look like bowing to political pressure,
even if that was not the case.

The move will only make matters worse when we go into a recession.
Yes, I meant when, not if.

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Re: What if Fed cut doesn't work?

Post by JoeRetire » Tue Mar 03, 2020 11:15 am

RubyTuesday wrote:
Tue Mar 03, 2020 10:57 am
And couldn’t this be interpreted by the world/market as the Fed succumbing to political influence?
Why yes. It could indeed be interpreted that way.
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Re: What if Fed cut doesn't work?

Post by wolf359 » Tue Mar 03, 2020 11:16 am

Watty wrote:
Tue Mar 03, 2020 10:31 am
What if Fed cut doesn't work?
To know if it "worked" or not you have to define what it is intended to do and that is unclear to me.
Is the rate cut intended to help an economy affected by an interrupted supply chain and reduced demand due to nervous consumers who are cutting back for fear of the virus? If so, it may not work.

Is the rate cut simply to boost the stock market for political reasons? It's likely the motivation in this case -- election year, Presidential tweet, followed by rate cut. Unfortunately, we run into a red line because we can't discuss politics.

To thread this needle, I'll focus on the action. The stock market is NOT the economy. The stock market does reflect market sentiment about the economy. In this case, the thing holding back economic expansion and trade is not a shortage of investment capital nor a shortage of credit. Ultimately, it comes down to earnings.

Will the rate cut arrest the market slide? In the long term, the economic stimulus will be inflationary, and this will boost the market. After things calm down, continued rate cuts and economic stimulus should make the markets roar.

In the short term, however, the key factor driving market sentiment is fear. It depends more upon containment measures in the US, and if the infection rates stay relatively low. If they climb significantly, the need to implement pandemic countermeasures in the US (shutting down public gatherings, businesses, and schools) will impact earnings. No amount of rate cuts will offset that fact.

The reality is that we're dealing with a new virus, and that presents a lot of unknowns. People don't like unknowns that can kill you, even if the likelihood is only 2%. The final result will be worse than "it's just a bad cold" but well short of "The Stand." The 1918 pandemic started out with a widespread mild flu, but mutated into something more virulent. There is the potential for this to get bad, so it is wise to be prepared. But there's no need to panic. Wash your hands frequently, and train your kids to do so as a habit. Be prepared for shortages and short-term local economic disruption. Make a plan for how you'd handle it if you or a loved one gets sick. On your finances, be prepared for volatility.

My opinion is that the rate cut will eventually work, but market sentiment is currently being driven by fear. If there's a drumbeat of bad news, the rate cut news will be drowned out.

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Re: What if Fed cut doesn't work?

Post by JoeRetire » Tue Mar 03, 2020 11:16 am

KlangFool wrote:
Tue Mar 03, 2020 11:08 am
It helps my bond index fund. So, it had worked.
Today's cut helped your bond index fund? And the day isn't even over.

Can you provide some details how and how much it helped?
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Re: What if Fed cut doesn't work?

Post by KlangFool » Tue Mar 03, 2020 11:20 am

JoeRetire wrote:
Tue Mar 03, 2020 11:16 am
KlangFool wrote:
Tue Mar 03, 2020 11:08 am
It helps my bond index fund. So, it had worked.
Today's cut helped your bond index fund? And the day isn't even over.

Can you provide some details how and how much it helped?
https://finance.yahoo.com/quote/AGG?p=A ... c=fin-srch

Just look at the ETF version of the Total Bond Market Index Fund (AGG). It is up around 0.5%.

Diversification is a good thing. The bond index fund is not the same as the MMF.

KlangFool
Last edited by KlangFool on Tue Mar 03, 2020 11:21 am, edited 1 time in total.

harvestbook
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Re: What if Fed cut doesn't work?

Post by harvestbook » Tue Mar 03, 2020 11:21 am

I sleep well knowing my bonds will return half the rate of inflation when I need them.
I'm not smart enough to know, and I can't afford to guess.

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Re: What if Fed cut doesn't work?

Post by Mickstick » Tue Mar 03, 2020 11:22 am

It's a good time to own gold ;)
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design" - F.A. Hayek, The Fatal Conceit

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Re: What if Fed cut doesn't work?

Post by JoeRetire » Tue Mar 03, 2020 11:22 am

KlangFool wrote:
Tue Mar 03, 2020 11:20 am
JoeRetire wrote:
Tue Mar 03, 2020 11:16 am
KlangFool wrote:
Tue Mar 03, 2020 11:08 am
It helps my bond index fund. So, it had worked.
Today's cut helped your bond index fund? And the day isn't even over.

Can you provide some details how and how much it helped?
https://finance.yahoo.com/quote/AGG?p=A ... c=fin-srch

Just look at the ETF version of the Total Bond Market Index Fund (AGG). It is up around 0.5%.

Diversification is a good thing. The bond index fund is not the same as the MMF.
So are you selling to lock in some gains? Or just mentally calling it a win?
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.

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Re: What if Fed cut doesn't work?

Post by KlangFool » Tue Mar 03, 2020 11:25 am

JoeRetire wrote:
Tue Mar 03, 2020 11:22 am
KlangFool wrote:
Tue Mar 03, 2020 11:20 am
JoeRetire wrote:
Tue Mar 03, 2020 11:16 am
KlangFool wrote:
Tue Mar 03, 2020 11:08 am
It helps my bond index fund. So, it had worked.
Today's cut helped your bond index fund? And the day isn't even over.

Can you provide some details how and how much it helped?
https://finance.yahoo.com/quote/AGG?p=A ... c=fin-srch

Just look at the ETF version of the Total Bond Market Index Fund (AGG). It is up around 0.5%.

Diversification is a good thing. The bond index fund is not the same as the MMF.
So are you selling to lock in some gains? Or just mentally calling it a win?
JoeRetire,

A) I am a "Buy, Hold, and Rebalance" person. With an AA of 60/40, I will rebalance either my 5/25 band are triggered or when my annual rebalancing date arrives. At this rate, my rebalancing band will trigger soon.

B) My 40% in the Wellington fund will lock in the gain every day.

KlangFool

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Re: What if Fed cut doesn't work?

Post by chipperd » Tue Mar 03, 2020 11:27 am

When I was a young adult, I used to take my grandmother out for lunch from time to time. I always enjoyed her company and found her to be a wise soul. She was a colorful character, daughter of eastern block Jewish immigrants from the Corona Park area of NYC. Took current events course at a local college every semester until age 90 just so she could debate with the kids.
On one such lunch, I was hemming an hawing about the possibility of breaking up with a long term girlfriend at the time. "But what if this...." "But what if that..." came up for me in the course of this discussion.
Then, one of the wisest things I have ever heard, even to this day, came forcefully out of my grandmother's mouth and stopped me in my tracks.
"What if your grandmother had balls, she'd be your grandfather"
Wise counsel from a great woman. Best return on investment for me yet.
Last edited by chipperd on Tue Mar 03, 2020 11:32 am, edited 2 times in total.

imflyboy
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Re: What if Fed cut doesn't work?

Post by imflyboy » Tue Mar 03, 2020 11:28 am

Well I’m not sure what the rate cut actually did, but today’s trading is wild!

I’m actually curious about the general sentiment with the public in regards to the virus. I’ve spoken to several friends and they are completely unconcerned and had taken zero action to prepare for possibly needing to stay home for a few weeks. There’s even a certain segment that doesn’t even believe the virus is real. Anyway, it seems to me that testing and appropriate health policy would do more than cutting rates to protect the economy....but then again I didn’t stay at a Holiday Inn last night

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Re: What if Fed cut doesn't work?

Post by acegolfer » Tue Mar 03, 2020 11:28 am

anoop wrote:
Tue Mar 03, 2020 10:45 am
They can cut to zero.

They can cut below zero.

They can restart perpetual QE.

They can start buying equities outright.
Is the Fed legally allowed to do the last one?

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Re: What if Fed cut doesn't work?

Post by bitdocmd » Tue Mar 03, 2020 11:30 am

JoeRetire wrote:
Tue Mar 03, 2020 10:11 am
So the Fed just cut rates by 50 bps.

What is it doesn't work? What's next?
More cuts eventually to zero. Also helicopter money.

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Re: What if Fed cut doesn't work?

Post by acegolfer » Tue Mar 03, 2020 11:32 am

RubyTuesday wrote:
Tue Mar 03, 2020 10:57 am
And couldn’t this be interpreted by the world/market as the Fed succumbing to political influence?

Note to mods: I don’t intend the preceding sentence to be a political statement, just trying to imagine how the world/market would interpret lowering interest rates in the current environment. Please remove just the second paragraph if it violates the forum rules.
Agree. I'm losing confidence in the Fed's independence.

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Re: What if Fed cut doesn't work?

Post by Seasonal » Tue Mar 03, 2020 11:33 am

What do you mean work?

The Fed wants to keep its policy rate below the market equilibrium interest rate. This is the rate that balances supply and demand and is not directly observable. The equilibrium rate is the rate consistent with stable economic growth given the Feds employment, inflation, etc. targets. The current supply shock is likely reducing expected growth, which would reduce the equilibrium interest rate. A policy rate above the equilibrium rate would be tightening, which is not what we need today. Tightening would reduce aggregate demand, leads directly to reduced growth.

In other words, the Fed action can help prevent the supply shock from reducing aggregate demand. Do nothing would passively tighten monetary policy. A rate cut is not going to directly fix a supply shock, but seems appropriate in light of the consequences of the supply shock.

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Re: What if Fed cut doesn't work?

Post by chipperd » Tue Mar 03, 2020 11:34 am

acegolfer wrote:
Tue Mar 03, 2020 11:32 am
RubyTuesday wrote:
Tue Mar 03, 2020 10:57 am
And couldn’t this be interpreted by the world/market as the Fed succumbing to political influence?

Note to mods: I don’t intend the preceding sentence to be a political statement, just trying to imagine how the world/market would interpret lowering interest rates in the current environment. Please remove just the second paragraph if it violates the forum rules.
Agree. I'm losing confidence in the Fed's independence.
Losing? That ship sailed 1/20/2017

Seasonal
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Re: What if Fed cut doesn't work?

Post by Seasonal » Tue Mar 03, 2020 11:37 am

greg24 wrote:
Tue Mar 03, 2020 10:39 am
The move seems kind of dumb. A half point rate cut at this moment in time won't magically fix everything.

But it is one less bullet in their pocket for the future. Two bullets if you want two quarter point cuts.
Heading off a problem (or at least ameliorating it) can be easier than fixing a worse problem later.

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Re: What if Fed cut doesn't work?

Post by stocknoob4111 » Tue Mar 03, 2020 11:38 am

JoeRetire wrote:
Tue Mar 03, 2020 10:29 am
Because a little push from rate cuts almost always gooses the market. At least temporarily.
every premature cut is something the Fed cannot use to combat a slowdown later on.. we are now at 1% after this cut and the average cuts in a recession is 5%... not sure how the Fed is going to react in the next recession.

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Re: What if Fed cut doesn't work?

Post by anoop » Tue Mar 03, 2020 11:41 am

acegolfer wrote:
Tue Mar 03, 2020 11:28 am
anoop wrote:
Tue Mar 03, 2020 10:45 am
They can cut to zero.

They can cut below zero.

They can restart perpetual QE.

They can start buying equities outright.
Is the Fed legally allowed to do the last one?
I think so.

Yellen had hinted at it when she was chair.
https://www.reuters.com/article/us-usa- ... SKCN11Z2WI

Edit: I see it’s not allowed.
Last edited by anoop on Tue Mar 03, 2020 11:43 am, edited 1 time in total.

acegolfer
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Re: What if Fed cut doesn't work?

Post by acegolfer » Tue Mar 03, 2020 11:42 am

Seasonal wrote:
Tue Mar 03, 2020 11:33 am
What do you mean work?

The Fed wants to keep its policy rate below the market equilibrium interest rate. This is the rate that balances supply and demand and is not directly observable. The equilibrium rate is the rate consistent with stable economic growth given the Feds employment, inflation, etc. targets. The current supply shock is likely reducing expected growth, which would reduce the equilibrium interest rate. A policy rate above the equilibrium rate would be tightening, which is not what we need today. Tightening would reduce aggregate demand, leads directly to reduced growth.

In other words, the Fed action can help prevent the supply shock from reducing aggregate demand. Do nothing would passively tighten monetary policy. A rate cut is not going to directly fix a supply shock, but seems appropriate in light of the consequences of the supply shock.
1. Isn't FF "effective" rate the market equilibrium rate?

"The effective federal funds rate (EFFR) is calculated as a volume-weighted median of overnight federal funds transactions reported in the FR 2420 Report of Selected Money Market Rates.a The New York Fed publishes the EFFR for the prior business day on the New York Fed’s website at approximately 9:00 a.m.b" https://apps.newyorkfed.org/markets/aut ... ed%20funds

Jack FFR1846
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Re: What if Fed cut doesn't work?

Post by Jack FFR1846 » Tue Mar 03, 2020 11:42 am

Well, it helped a little.

Then Powell opened his mouth and the market dives.
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