The Coronavirus Drove the Fed's Rate Cut, But is that a Good Thing?
It feels like ten years have passed in the last ten weeks since the coronavirus began cutting its way through populations, first in Asia and now across the globe. Daily infection updates, new cities, new theories on how it spreads, and the stock market gyrations fill our news feeds now. And so it was not entirely unexpected today that the U.S. Federal Reserve announced that it would cut its benchmark rate by 0.50% to a ceiling of 1.25%. What is going on here?
While we are not public health officials, at TRA we can and do look at the coronavirus from a credit risk lens. To date, the coronavirus has not spread widely throughout the U.S. That’s great news, but people and markets are anxious. At this early stage, speculation is rampant, with some outlets stating the virus will be a global pandemic, while others suggest our fears are overblown.
We think it’s fair to look at the coronavirus the same way people look at religion. Whether or not you believe in the coronavirus, others do, and that matters. That is inherently why the Fed lowered rates today. The Fed’s move is simply trying to calm the markets amid this phase of rampant, early speculation to get investors and consumers to behave more rationally. It will add more liquidity in the short term and could potentially ease the pain of a coming recession. This move will make the Fed look smart, even prescient, if the virus’ spread slows or even stops.
Of course, if the virus is real, the Fed’s moves will not likely prevent a broader deterioration in macro conditions. Last we checked, consumers don’t look at Fed rate policy to determine spending habits amid a global public health emergency. The movement of money will ultimately slow, many businesses will face mounting fiscal pressure, and certainly it is possible we could slip into recession. And if the global or U.S. economies slide into recession, we will now have less flexibility in our monetary policy to reinvigorate the economy due to the Fed’s rate cut. The effects on commercial real estate and beyond would be real, but at this stage, impossible to quantify.