Did the Fed Waste Ammunition?

March 10, 2020
Fed Lowers Rates
The stock market rallied the day before the latest rate drop but fell back once it was announced.

Even before we saw the jobs report, the Federal Reserve decided to step in with an "emergency" rate cut in response to the coronavirus crisis before its next scheduled meeting. Even though we have not seen many negative reports on the economy, the Fed saw what was on the horizon. The only problem is that the markets viewed this as somewhat of a panic move by the Fed -- verifying that the worst may be coming. The stock market rallied the day before the news but fell back after the Fed acted. From there, the recent volatility continued.

Of course, one day of reaction does not mean that the Fed's move was not on target. We do know that if a coronavirus slowdown hits, the Fed will have less ammunition to fight with, as their short-term rates are pretty close to zero. With regard to the jobs report, the economy still seems strong. The increase of 273,000 jobs in February was above expectations. There was also a revision upward of January's strong report -- to the tune of almost 50,000 jobs. Together the report was seen as much stronger than expected. The headline unemployment number rose to 3.6%, still near a historic low. Wage increases were at 3.0% annually, meaning that inflation remains under control.

The next report that is released will not be considered a "pre-virus" report, though certainly the full effect of the virus may not be seen for some time within our economy. We obviously receive a lot of goods from China and the shortages which are cropping up will likely have some impact. Certainly, the travel industry will be affected as well. How much, we are not sure. We can say that our lower interest rates will counter with some positive stimulus in the short run, especially within the real estate markets and with regard to refinances.