Our intuition when we heard the big news today from the Fed was that it sounded a little panicky. Grandmaster Jay’s post-cut presser did little to convince us otherwise.
To pay tribute to him, the Fed chairman was clear enough that the cut was not a panacea. First and foremost, the extent of the shock caused by the coronavirus outbreak would depend on the work currently being carried out by health professionals. Fiscal policy also has an important role to play. He also noted that the US economy is reasonably strong and will rebound, even if the coronavirus stays long.
We are still not sure if he convinced us that it was worth cutting 50 basis points for the first time since 2009 (and the first move outside the normal meeting schedule since 2008) in this moment.
The FOMC believed that something preventive was needed to avoid a tightening of funding conditions. The Fed chairman also cited indicators that parts of the tourism industry, such as hotels, were starting to feel the impact of the epidemic.
He seemed confident that the reduction would help these sectors by strengthening the sentiment of businesses and consumers. But we don’t buy the reasoning here. Does it make sense to think that the Fed’s decision will lead to a wave of hotel bookings? Is it even desirable at the moment? The only line of thought that we can see is that the reduction in borrowing costs will lead to a greater increase in demand once the panic subsides.
We liked the sound of his answer to a question from the Washington Post on whether the Fed would consider alleviating companies suffering from severe demand declines. He said the Fed and other supervisors were willing to speak to the banks about the flexibility of companies that are severely affected by the economic impact of the virus.
There is another aspect of the press conference that we think is worth mentioning. He was rather optimistic about the joint action of the world economic authorities. We don’t know what form this coordination would take, but when asked, he seemed more optimistic than those of us who read the G7 statement earlier this afternoon could have imagined.