That didn’t take long.
Just a few days after stocks hit an all time high amid investor complacency that China’s ever more audacious lies about the declining number of new coronavirus cases confirms that Beijing is on top of the domestic epidemic, and even if they are not, the Fed will step in and cut rates or do more QE – because somehow printing money and printing antiviral antibodies is comparable – stocks plunged as it became abundantly clear that the coronavirus pandemic is not only not fading, but on the contrary, it starting to spread around the globe with new clusters emerging in South Korea, Japan and Italy.
And with stocks crashing and the Dow dropping over 1,000 points, suddenly the complacency that “all is well” was shattered with a hammer.
Which leave the Fed, and lo and behold, with the S&P just a fraction away from the all time highs it printed just last week despite today’s tumble, central bankers have emerged from their caves and are already calling for the Fed to cut rates. Case in point, former Minneapolis Fed Narayana Kocherlakota (what is it with Minneapolis spawning the biggest uber-doves in history?) has penned a Bloomberg op-ed in which the only FOMC member who was the first and only Fed member to put in a negative dot on the Fed’s dot plot, said that the FOMC shouldn’t wait until the March 18 FOMC committee, and should in fact conduct an intermeeting cut “to deal with this clear and pressing danger” adding that he “would urge an immediate cut of at least 25 basis points and arguably 50 basis points. That’s a cheap insurance policy for the economy that the Fed shouldn’t pass up” even though as he says in the same op-ed “it isn’t clear how much economic damage the virus will do. ”
And there you have it: a 3% drop from all time highs is now a sufficient and necessary condition for the Fed to not only cut rates, but to cut rates now “just because”, and not wait until the next scheduled FOMC appearance.
And while we are confident Kolcherlakota’s appeal to USSR-style central planning will be mocked by the cynics and what little is left of free market thinkers, it is only a matter of time before the Fed does cut, and not just as an insurance policy, but proceeds to then cut all the way to zero, because as we explained last night, the 10Y yield dropping below the 1.40% tipping point and pushing recession odds to a near certainty based on a historical lookback basis for the NY Fed’s recession index…
… means that the countdown to 0% rates is back on with the market now expecting the Fed Funds rate to hit the zero lower bound in a little over 12 months.
In short, not only is the Fed going to cut, but as Janet Yellen hinted last week, the Fed’s next big monetary “innovation” will be to buy stocks during – or maybe even ahead of – the next crisis now that everything is being done on a pre-emptive fashion, which at the rate China’s economy is locking up, may take place as soon as this summer.
Meanwhile, for those willing to waste 2 minutes of their life, Kocherlakota’s full op-ed is below:
Such a global economic slowdown would likely lead to continued upward pressure on the U.S. dollar, which would drive inflation even further below the Federal Reserve’s 2% target in the next couple of years. And a broad slowdown in the world economy would lead to lower U.S. employment growth, as American businesses endure reduced demand for their goods and services.
My benchmark forecast is that the U.S. economy will remain resilient to these forces. But there is a substantial risk that such a forecast could be wrong. One possible strategy is to wait until there actually is a slide in the economy before easing interest rates. But rates are still only a little above zero and so the Fed has few tools available to offset adverse shocks. In this situation, a basic precept of monetary policy is to keep the economy as healthy as possible in advance of downturns. As New York Federal Reserve Bank President John Williams explained in a speech last year, that means cutting interest rates in a pre-emptive fashion when threats to growth become more pronounced. Of course, it was exactly in response to the increase in global downside risks that the Fed cut interest rates by 75 basis points, or three-quarters of a percentage point, in 2019.
The Fed’s rate-setting Federal Open Market Committee holds its next meeting on March 17-18. I don’t think that the FOMC should wait that long to deal with this clear and pressing danger. I would urge an immediate cut of at least 25 basis points and arguably 50 basis points. That’s a cheap insurance policy for the economy that the Fed shouldn’t pass up.
Ignore the fact that collapsing supply chains will send prices soaring, not plunging, as sellers of end-products have no choice but to hike prices as they scramble to find and utilize far more expensive China alternatives, fast forwarding 1 month when the Fed has cut in “pre-emptive fashion” and stocks have soared back to all time highs even as the global economy has ground to a halt, we wonder what catalyst will the US central planners use as their bogeyman for the next and hopefully final magic act: the “pre-emptive” buying of all financial (and other) assets, as the pandemic-gripped world turns to sell.