What if Fed cut doesn't work?

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

Post by squirm » Tue Mar 03, 2020 1:34 pm

veggivet wrote:
Tue Mar 03, 2020 1:28 pm
The market does not appear to be impressed. COVID-19 maintains a 'no comment' policy.
Is it really the covid? Bonds were inverted last year.

They did the .5 cut now because their new belief is acting sooner rather than later is better when you're low on ammo.

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

Post by beehivehave » Tue Mar 03, 2020 1:36 pm

This cannot be repeated enough: The monetary policy goals of the Federal Reserve are to foster economic conditions that achieve both stable prices and maximum sustainable employment. It is not a part of the Fed's mandate to encourage the stock market, although this can be a side-effect.

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Re: What if Fed cut doesn't work?

Post by Sheepdog » Tue Mar 03, 2020 1:39 pm

beehivehave wrote:
Tue Mar 03, 2020 1:36 pm
This cannot be repeated enough: The monetary policy goals of the Federal Reserve are to foster economic conditions that achieve both stable prices and maximum sustainable employment. It is not a part of the Fed's mandate to encourage the stock market, although this can be a side-effect.
Yes
“One moment of patience may ward off great disaster. One moment of impatience may ruin a whole life.” — Chinese Proverb

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Re: What if Fed cut doesn't work?

Post by Seasonal » Tue Mar 03, 2020 1:40 pm

acegolfer wrote:
Tue Mar 03, 2020 12:57 pm
Seasonal wrote:
Tue Mar 03, 2020 12:38 pm
acegolfer wrote:
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
The EFFR is based on transactions between banks. The equilibrium rate is based on the broader market and is not directly observable. Whatever the equilibrium rate before the coronavirus shocks, it is lower now, which is likely why the Fed cut.

As one monetary economist put it, if you're trying to drive your car at a steady rate and you come to a hill, you have to push the gas peddle. If you don't, you'll slow down. I hope the analogy is clear.
I suppose we were taught different Economics. This is how I view equilibrium rate. https://en.wikipedia.org/wiki/Loanable_funds
Please be specific as to what you disagree with.

At its most general level, there is some interest rate, however you want to define it. It has decreased as a result of recent events. This brought the Fed rate higher in relation to that rate. The Fed rate being higher would constitute a monetary tightening, so the Fed had to cut to avoid this tightening.

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Re: What if Fed cut doesn't work?

Post by bitdocmd » Tue Mar 03, 2020 1:42 pm

beehivehave wrote:
Tue Mar 03, 2020 1:36 pm
This cannot be repeated enough: The monetary policy goals of the Federal Reserve are to foster economic conditions that achieve both stable prices and maximum sustainable employment. It is not a part of the Fed's mandate to encourage the stock market, although this can be a side-effect.
It may not be an official part of the mandate, but the Fed willingly and knowingly takes repeated actions that prop up the stock market, encourage equity inflation, and punish savers.

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Re: What if Fed cut doesn't work?

Post by veggivet » Tue Mar 03, 2020 1:46 pm

The Fed has never been more focussed on the stock market than it has been during the last 3 years.
If you watch your pennies, your dollars will take care of themselves.

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Re: What if Fed cut doesn't work?

Post by JoeRetire » Tue Mar 03, 2020 1:48 pm

Stormbringer wrote:
Tue Mar 03, 2020 12:47 pm
It seems counter-productive to me. It's like pushing a giant panic button while telling everyone not to panic.
Keep Calm and Carry On...

But we need more cutting further easing, because it's not fair to USA.
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Re: What if Fed cut doesn't work?

Post by Seasonal » Tue Mar 03, 2020 1:48 pm

bitdocmd wrote:
Tue Mar 03, 2020 1:42 pm
beehivehave wrote:
Tue Mar 03, 2020 1:36 pm
This cannot be repeated enough: The monetary policy goals of the Federal Reserve are to foster economic conditions that achieve both stable prices and maximum sustainable employment. It is not a part of the Fed's mandate to encourage the stock market, although this can be a side-effect.
It may not be an official part of the mandate, but the Fed willingly and knowingly takes repeated actions that prop up the stock market, encourage equity inflation, and punish savers.
Savers are people who own interest paying securities, aren't working and don't own any equities?

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Re: What if Fed cut doesn't work?

Post by JonnyDVM » Tue Mar 03, 2020 1:57 pm

BoggledHead2 wrote:
Tue Mar 03, 2020 11:54 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 to 0 or negative rates, false sense of security, people borrowing/spending money they don’t have, new recession, those with money capitalize on recession, and market eventually rises back

Basically, same BS that always happens in cycles
I am now believing the speculation I have read that negative rates are around the corner for us.
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Re: What if Fed cut doesn't work?

Post by marky2kk » Tue Mar 03, 2020 1:58 pm

beehivehave wrote:
Tue Mar 03, 2020 1:36 pm
This cannot be repeated enough: The monetary policy goals of the Federal Reserve are to foster economic conditions that achieve both stable prices and maximum sustainable employment. It is not a part of the Fed's mandate to encourage the stock market, although this can be a side-effect.
This is only partly true, as the Fed's mandate includes financial stability nowadays.

From: https://www.federalreserve.gov/newseven ... 80525a.htm

"In addition, we have a responsibility, shared with other government agencies, to promote financial stability. I view this responsibility as being highly complementary to other aspects of our mission: Financial stability promotes sustainable economic growth, and a stable, well-functioning financial system is an effective transmission channel for monetary policy. Indeed, there can be no macroeconomic stability without financial stability."

I mean, basically, the market priced in a 50bps cut. Whether that cut happens at the FOMC or intermeeting, not sure how much it matters. But you can imagine the havoc if the market prices in a 50bps cut and the Fed does something different. In that sense, the Fed did not really have a choice. But it's all endogenous... different comments by Fed officials in the past week and the market prices in something different, but who knows where equity prices would stand then.

Also the Fed does not punish savers. It implicitly punishes risk-aversion.

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Re: What if Fed cut doesn't work?

Post by centennialstate » Tue Mar 03, 2020 2:02 pm

It's working like how hair of the dog works.
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Re: What if Fed cut doesn't work?

Post by willthrill81 » Tue Mar 03, 2020 2:04 pm

Jags4186 wrote:
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.
I'm inclined to agree. The Fed cannot wave a wand and fill all of these empty supply chains with goods. It will take time for this wound to heal.
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Re: What if Fed cut doesn't work?

Post by beehivehave » Tue Mar 03, 2020 2:12 pm

I don't know what the Fed is trying to achieve, so it does seem kind of stupid to me. It seems they are attacking with the wrong weapon and wasting ammo. Perhaps the recession warning lights are blinking a lot brighter than we know.

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Re: What if Fed cut doesn't work?

Post by why_did_i_lay_down » Tue Mar 03, 2020 2:24 pm

Unladen_Swallow wrote:
Tue Mar 03, 2020 10:41 am
Then the BH panic threads will multiply. Doomsday scenarios galore.

Toilet paper will sell out.
Uhhhh... am I missing something? Do I need to stock up on some TP now? :shock:

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Re: What if Fed cut doesn't work?

Post by Scooter57 » Tue Mar 03, 2020 2:42 pm

Also, it is worth noting that "the economy" is not just the stock market, though policy of late has been entirely directed towards boosting share prices.

How do rate cuts keep people employed when their businesses are shut down or customers are avoiding visiting them? The money to pay back even low interest loans has to come from somewhere.

There are other tools for addressing this kind of economic challenge, but they are not ones that central banks can exercise.

I stated a few days ago in another post on this board that things would get very ugly if the Fed cut rates and that didn't do its usual magic. We may be seeing that play out. I just feel sorry for the people who are going to suffer because, worldwide, the only approach to managing economies for the past decade has been to lower rates.

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Re: What if Fed cut doesn't work?

Post by JamalJones » Tue Mar 03, 2020 2:44 pm

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?
Kent Brockman : Professor, without knowing precisely what the danger is, would you say it's time for our viewers to crack each other's heads open and feast on the goo inside?

Professor : Yes I would, Kent.
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Re: What if Fed cut doesn't work?

Post by willthrill81 » Tue Mar 03, 2020 2:45 pm

beehivehave wrote:
Tue Mar 03, 2020 2:12 pm
I don't know what the Fed is trying to achieve, so it does seem kind of stupid to me. It seems they are attacking with the wrong weapon and wasting ammo. Perhaps the recession warning lights are blinking a lot brighter than we know.
"When the only tool you have is a hammer, all problems look like nails."
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: What if Fed cut doesn't work?

Post by bitdocmd » Tue Mar 03, 2020 2:48 pm

Scooter57 wrote:
Tue Mar 03, 2020 2:42 pm
Also, it is worth noting that "the economy" is not just the stock market, though policy of late has been entirely directed towards boosting share prices.

How do rate cuts keep people employed when their businesses are shut down or customers are avoiding visiting them? The money to pay back even low interest loans has to come from somewhere.

There are other tools for addressing this kind of economic challenge, but they are not ones that central banks can exercise.

I stated a few days ago in another post on this board that things would get very ugly if the Fed cut rates and that didn't do its usual magic. We may be seeing that play out. I just feel sorry for the people who are going to suffer because, worldwide, the only approach to managing economies for the past decade has been to lower rates.
Thoughts on below?

”Fed rate cut leaves only one final gun to fire: TARP 2.0. Within a few months, we should expect some kind of fiscal program to help companies who will default en masse and potentially seize credit markets if not bailed out...“

-Tweet from Chamath Palihapitiya

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Re: What if Fed cut doesn't work?

Post by acegolfer » Tue Mar 03, 2020 2:52 pm

Seasonal wrote:
Tue Mar 03, 2020 1:40 pm
Please be specific as to what you disagree with.
I disagree with your definition of equilibrium interest rate. I define it as "the rate at which the quantity of money demanded is equal to the quantity of money supplied". So by this definition, the current effective FFR is the market equilibrium rate.

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Re: What if Fed cut doesn't work?

Post by acegolfer » Tue Mar 03, 2020 2:57 pm

marky2kk wrote:
Tue Mar 03, 2020 1:58 pm
beehivehave wrote:
Tue Mar 03, 2020 1:36 pm
This cannot be repeated enough: The monetary policy goals of the Federal Reserve are to foster economic conditions that achieve both stable prices and maximum sustainable employment. It is not a part of the Fed's mandate to encourage the stock market, although this can be a side-effect.
This is only partly true, as the Fed's mandate includes financial stability nowadays.

From: https://www.federalreserve.gov/newseven ... 80525a.htm

"In addition, we have a responsibility, shared with other government agencies, to promote financial stability. I view this responsibility as being highly complementary to other aspects of our mission: Financial stability promotes sustainable economic growth, and a stable, well-functioning financial system is an effective transmission channel for monetary policy. Indeed, there can be no macroeconomic stability without financial stability."
Right below that he also wrote

"Within our narrow mandates, to safeguard against political interference, central banks are afforded instrument independence‑‑that is, we are given considerable freedom to choose the means to achieve legislatively-assigned goals. While the focus is often on monetary policy independence, research suggests that a degree of independence in regulatory and financial stability matters improves the stability of the banking system and leads to better outcomes.3 For this reason, governments in many countries, including the United States, have granted some institutional and budgetary independence to their financial regulators."

Powell talking about independence. lol.

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Re: What if Fed cut doesn't work?

Post by stocknoob4111 » Tue Mar 03, 2020 2:59 pm

it backfired... by cutting the Fed has just officially acknowledged that there is a serious problem. They should have done it.

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Re: What if Fed cut doesn't work?

Post by JoeRetire » Tue Mar 03, 2020 3:02 pm

JamalJones wrote:
Tue Mar 03, 2020 2:44 pm
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?
Kent Brockman : Professor, without knowing precisely what the danger is, would you say it's time for our viewers to crack each other's heads open and feast on the goo inside?

Professor : Yes I would, Kent.
Kent Brockman: I, for one, welcome out new virus overlords. I’d like to remind them that as a trusted TV personality, I can be helpful in rounding up others to toil in their viral meme factories and disinformation caves.
Last edited by JoeRetire on Tue Mar 03, 2020 3:10 pm, edited 1 time in total.
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MathWizard
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Re: What if Fed cut doesn't work?

Post by MathWizard » Tue Mar 03, 2020 3:04 pm

Fed made the cut today, DJIA down 2.5% as of 3pm EST.

It was really successful :oops:

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Re: What if Fed cut doesn't work?

Post by willthrill81 » Tue Mar 03, 2020 3:04 pm

stocknoob4111 wrote:
Tue Mar 03, 2020 2:59 pm
it backfired... by cutting the Fed has just officially acknowledged that there is a serious problem.
The market didn't need the Fed to tell them that there is a serious problem. IMHO, the problem is just not one that the Fed can solve with the tools in its toolbox. Cheap money is not a substitute for goods in a global supply chain.
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Re: What if Fed cut doesn't work?

Post by palanzo » Tue Mar 03, 2020 3:04 pm

MathWizard wrote:
Tue Mar 03, 2020 3:04 pm
Fed made the cut today, DJIA down 2.5% as of 3pm EST.

It was really successful :oops:
+1

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Re: What if Fed cut doesn't work?

Post by JoeRetire » Tue Mar 03, 2020 3:09 pm

MathWizard wrote:
Tue Mar 03, 2020 3:04 pm
Fed made the cut today, DJIA down 2.5% as of 3pm EST.

It was really successful :oops:
Who knows what it would have been without the cut?
The day isn't yet over.
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Re: What if Fed cut doesn't work?

Post by Pete12 » Tue Mar 03, 2020 3:13 pm

In before the lock!

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Re: What if Fed cut doesn't work?

Post by F150HD » Tue Mar 03, 2020 3:18 pm

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.
+1

Am no expert but something about the cut doesn't even make any sense. The virus scare will be ongoing for awhile I'd guess....they can't just keep cutting the rate everytime the market panics over the virus spread.

I wish they would have waited for this virus to subside....then if the market needs it when we enter a true recession, then do a cut etc.

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Re: What if Fed cut doesn't work?

Post by JonnyB » Tue Mar 03, 2020 3:35 pm

F150HD wrote:
Tue Mar 03, 2020 3:18 pm
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.
+1

Am no expert but something about the cut doesn't even make any sense. The virus scare will be ongoing for awhile I'd guess....they can't just keep cutting the rate everytime the market panics over the virus spread.

I wish they would have waited for this virus to subside....then if the market needs it when we enter a true recession, then do a cut etc.
The job of the Fed is to prevent a recession. Once the recession starts is too late. By that time people are already losing their jobs. Once you are rolling downhill, it's difficult to stop.

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Re: What if Fed cut doesn't work?

Post by chipperd » Tue Mar 03, 2020 3:42 pm

Wrong tool for this non-problem.

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Re: What if Fed cut doesn't work?

Post by Grt2bOutdoors » Tue Mar 03, 2020 3:45 pm

Corsair wrote:
Tue Mar 03, 2020 1:12 pm
Grt2bOutdoors wrote:
Tue Mar 03, 2020 1:01 pm
The cut is a mistake, all it does is reduce the effectiveness of future actions. There is no shortage of liquidity, employment has not been affected or will be affected by a rate cut, rise or leaving it as is. This is a psychological phenomena gripping the markets, but a rate cut is not the proper salve for such afflictions.
The market demanded it; the big money gets what they want.
Waah! Waaah! The big money is going to sink the economy, because they wanted it! You want a rate cut? Fine, cut the rates, and then raise the margin requirement from 50% to 75% to counteract the rampant speculations that are going on.
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Re: What if Fed cut doesn't work?

Post by Grt2bOutdoors » Tue Mar 03, 2020 3:46 pm

JonnyB wrote:
Tue Mar 03, 2020 3:35 pm
F150HD wrote:
Tue Mar 03, 2020 3:18 pm
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.
+1

Am no expert but something about the cut doesn't even make any sense. The virus scare will be ongoing for awhile I'd guess....they can't just keep cutting the rate everytime the market panics over the virus spread.

I wish they would have waited for this virus to subside....then if the market needs it when we enter a true recession, then do a cut etc.
The job of the Fed is to prevent a recession. Once the recession starts is too late. By that time people are already losing their jobs. Once you are rolling downhill, it's difficult to stop.
By cutting the rates, they've admitted that the economy is in the tank! Congratulations, go get your blue ribbon now. :oops:
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Re: What if Fed cut doesn't work?

Post by Scooter57 » Tue Mar 03, 2020 3:47 pm

bitdocmd wrote:
Tue Mar 03, 2020 2:48 pm
Scooter57 wrote:
Tue Mar 03, 2020 2:42 pm
Also, it is worth noting that "the economy" is not just the stock market, though policy of late has been entirely directed towards boosting share prices.

How do rate cuts keep people employed when their businesses are shut down or customers are avoiding visiting them? The money to pay back even low interest loans has to come from somewhere.

There are other tools for addressing this kind of economic challenge, but they are not ones that central banks can exercise.

I stated a few days ago in another post on this board that things would get very ugly if the Fed cut rates and that didn't do its usual magic. We may be seeing that play out. I just feel sorry for the people who are going to suffer because, worldwide, the only approach to managing economies for the past decade has been to lower rates.
Thoughts on below?

”Fed rate cut leaves only one final gun to fire: TARP 2.0. Within a few months, we should expect some kind of fiscal program to help companies who will default en masse and potentially seize credit markets if not bailed out...“

-Tweet from Chamath Palihapitiya
It is not possible to comment on that analysis without delving into political issues that may not be discussed here.

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Re: What if Fed cut doesn't work?

Post by beth65 » Tue Mar 03, 2020 3:48 pm

Should the goal of the Fed be to prevent a recession at all costs? Are recessions always a negative? We need a reset to restore balance, and market cycles cannot be avoided forever, no matter how hard they try to kick the can down the road. The more financial engineering that occurs to prevent a recession might just make the recession worse. If markets weren't propped up, and valuations detached from reality, perhaps it would only become a one-year bear versus a full-blown recession.

Some of the market indicators including BLS numbers for CPI, jobs, etc., is based upon surveys, and hard actual data comes many months later. 2018 employment data was revised down by over 500k in March of 2019, so it will be interesting to see what BLS's final numbers for 2019 come in at this month. I remember in November when ADP, using actual data from private employers, was down sharply in November at only 67k (instead of 156k estimate), while BLS numbers were far above estimates at 266k vs 180k estimated. Those are two sharply contrasting figures, so which one is accurate? Are we certain these surveys are the only way to get a pulse of what the employment and inflation truly are currently? Those are both lagging indicators anyhow.

One has to question all of the non-GAAP and EBIDTA numbers that corps use when reporting to wall street. I work at a Fortune 100, and I can tell you that the numbers and the bonus payout internally was completely contradictory to what the numbers for the street were (revenue above estimates, earnings barely below estimates at -.01% less than expected). My industry tends to be a bell weather for the economy in some ways, so it has felt like things are not as great as the talking heads in financial media want us to believe.

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Re: What if Fed cut doesn't work?

Post by RetireBy55 » Tue Mar 03, 2020 3:57 pm

chipperd wrote:
Tue Mar 03, 2020 3:42 pm
Wrong tool for this non-problem.
It's actually a HUGE problem, potentially on the scale of the Spanish Flu of 1918-19 (killed 50M+ people globally). Recommend doing some reading, staring with: https://rentry.co/covid-19-is-not-like-the-flu ...

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Re: What if Fed cut doesn't work?

Post by adam1712 » Tue Mar 03, 2020 4:01 pm

I don't necessarily agree with the policy but an argument can be made if the supply chain is a temporary issue because of Covid-19, then it might make sense to help companies borrow cheaply so they can avoid layoffs and bankruptcies to weather the storm. If it's a more long term supply chain problem, then it only delays the inevitable and likely makes it worse. Personally, I don't see this specific move as that bad of a use of Fed policy, it's just been overused so much in the past that there continues to be very few future options.

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Re: What if Fed cut doesn't work?

Post by beth65 » Tue Mar 03, 2020 4:05 pm

adam1712 wrote:
Tue Mar 03, 2020 4:01 pm
I don't necessarily agree with the policy but an argument can be made if the supply chain is a temporary issue because of Covid-19, then it might make sense to help companies borrow cheaply so they can avoid layoffs and bankruptcies to weather the storm. If it's a more long term supply chain problem, then it only delays the inevitable and likely makes it worse. Personally, I don't see this specific move as that bad of a use of Fed policy, it's just been overused so much in the past that there continues to be very few future options.
They have already been borrowing cheaply. We were at 1.75%-1.5% before they just dropped another 50bps.

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Re: What if Fed cut doesn't work?

Post by LadyGeek » Tue Mar 03, 2020 4:07 pm

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