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On March 23, the Federal Reserve announced an all-out emergency plan, a plan designed to promote economic stability in the midst of this pandemic. That same day, coronavirus fears sent the stock market dropping to its lowest level since before the 2016 presidential election. A day later, the market rebounded on hopes that the Fed’s actions in a new relief plan, approved by Congress, will help an economy rapidly sinking into recession. Since the coronavirus outbreak, huge sectors of the economy have been forced to shut down, and unemployment claims have skyrocketed.
Let’s look closer at the Fed’s emergency plan. The Fed’s coronavirus emergency plan pulls all levers. In other words, Fed Chairman Jerome Powell and his team are clearly prepared to do anything and everything in their power to minimize the mounting economic damage of this pandemic. On March 15, a week before the emergency plan was announced, the Fed had already slashed their benchmark interest rate to zero. In a normal period of slowing growth and a creeping recession, that move alone might’ve been enough to improve things. However, even before the coronavirus outbreak, these have not been normal times.
Like a pendulum, the markets’ steep gains and dramatic declines have us all on the coronavirus rollercoaster. The Fed’s action is unprecedented as we witness the reduced demand for products and services in supply chains, with the whole globe being put on hold right now. Do you really think that the Fed’s stimulus is going to get us out of this mess?
Well, in the traditional sense, absolutely not. Lowering interest rates to zero and cutting Fed funds rates did very little back in 2008, and it’s not going to do anything now.
I feel like the stimulus plan itself is somewhat unrealistic and it’s more of a feel-good move. There are really no filtering mechanisms on how folks that are designated to receive it are going to be able to access it. It’s going to be a work in progress. We’re going to see really ugly numbers and subsequently a third correction. Now when we look at what happened with the last of stimulus in 2008, we see that it took five months for the stock market to hit the lows. In October 2008, we passed a massive stimulus, and it took five months before we hit that March 2009 low in the market.
In the markets, we see a dramatic repositioning in things in the new corona economy. Layoffs, furloughs and repositioning business models will be the new norm. The economy’s going to be affected, with some companies are surviving and even prospering as a result of this. It will require all of us to retool to some extent.
About the same time the Fed’s emergency plan was being announced, the financial markets also got hopeful news that lawmakers had reached a deal on a $2 trillion stimulus package to combat the effects of the coronavirus. This bill as it stands includes $1,200 checks to be sent to many Americans. It also includes a $367 billion package for small businesses, a $50 billion package specifically for passenger airlines, $8 billion for cargo airlines, and $17 billion for firms that are deemed important to national security.
Even if you do push down lending rates, people aren’t going to go out, borrow money and spend, which is where the Fed may have to go negative. Once the demand starts to come up and people want to borrow, the next problem is that banks are going to be tougher on credit because of what we’ve just been through. They’re afraid, and they want to make sure that people aren’t going to default on loans. That’s why I believe the next move for the Fed will be going negative on the federal funds rate.
The Fed can give away free money, they can lower rate short term rates to zero, they can do quantitative easing to drive down long term rates, but people aren’t going to spend money. You can print money and flood the economy with it, but if people are not comfortable, if they don’t know when they’re going to be able to go back to work or when they’re going to be able to leave their home again, they’re not going to spend that money.
The Fed – and the Government – are becoming both the lenders of last resort and also the buyers of last resort. I don’t think we’ve ever done that before. Our economy and banking system have become a Japanese model. It’s unbelievable.
I believe we’re heading towards negative interest rates. The Fed is now saying that they’re going to buy corporate bonds, which is unprecedented. There has been some talk in the past about the Fed buying stocks to prop up the stock market. That’s not something that they’re talking about right now, but I wouldn’t be surprised if we end up seeing that.
I believe what the Government’s doing to promote and help businesses is going to be a logistical nightmare. I think a lot of smaller businesses aren’t going to trust it and that’s going to be a problem. Perhaps the biggest thing that I heard is that they’re propping up the airlines and are starting to treat the airlines almost like a quasi-utility. As it’s something that’s transportation-based, it needs to be supported in some sort of way, some quasi-nationalization if you will, and that is important because we do need to have airline transportation. The world has become dependent upon it just as you can argue that 80 years ago they had become dependent upon having an automobile.
Helicopter money is a last resort type of monetary stimulus strategy to boost economic output. The concept has been floating around for some time. Most recently, former Democratic candidate Andrew Yang’s plan to give impoverished Americans $1,500 a month is an example. Though at face value it’s theoretically feasible, from a practical standpoint, it is considered an unconventional monetary policy tool whose implementation would be unrealistic.
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