On the margin, I'm still slightly bearish on the whole situation due to the combination of the virus' absurdly high infection rate[0] and its long incubation period (I'll let each one of you be the judge of how long that is...)
[0] https://duckduckgo.com/?q=infection+rate+sars+vs+coronavirus...
Fiscal policy (e.g. the government buying tanks) absolutely affects the real economy.
The central bank doesn't control fiscal policy. It controls monetary policy. Monetary policy also affects the real economy, just indirectly.
A temporary boost to the market gives more time for the true long term impact to the supply chain to play out. It may turn out that the boost only gave a short respite but it may also turn out that it saved the market unneeded turmoil.
A short term boost also gives people a chance to take a breath, step back and take a more rational approach.
There are reports of kidney damage and damage to fertility among men who have recovered. Are those true? We don’t know. We have no idea.
The rational response to a deadly virus with so many unknown factors is to hunker down, avoid mass gatherings, and exercise other precautionary measures. These precautionary measures mean fewer people traveling, going to the movies, going out to dinner, attending conferences, etc. There is nothing the Fed can do to blunt this reaction besides pour money into Coronavirus research and hope they find a vaccine or remedy before it drags the economy into a recession.
You're right to highlight those aspects of the virus and I find them noteworthy as well.
However, the statistics I am most interested in is mortality rate and rate of asymptomatic infections.
I note with interest that among the 700+ infected on the cruise ship, there were 6 deaths as of yesterday - and this is among a relatively geriatric population. So, perhaps we see a mortality rate of <1% among a greater risk population.
I think the death rate will ultimately depend on whether everyone who needs hospital treatment can get it. And that's why I think the Diamond Princess may not be representative of what happens in the real world.
Your death count is incorrect. Several deaths occurred after cruise members returned to their home country, and are currently counted as deaths in their home country instead of the cruise ship.
Take for example: 78-year-old man in Perth - got infected on the cruise ship - but counted as a death in Australia.
The good news is assuming you trust China’s numbers new infections are down massively from a February 2nd peak. Deaths in China are also down significantly but less so, again assuming you trust their numbers.
[0] direct link: https://www.arcgis.com/apps/opsdashboard/index.html#/bda7594...
[1] posted to HN: https://news.ycombinator.com/item?id=22475060
The statistic influencers currently are China, South Korea and Iran.
Then it seems to help that people are more aware and numbers seem to be dropping. I'm short-term bearish, although it could change with an extreme outlier within the EU.
It also helps that I can see what a big corporation ( where I work) is doing and I don't see any panic. Rather creating awareness.
I'm also aware of the most vulnerable companies ( travel + flight) where a friend works and it seems to be okay, as in: "not as bad as the news seems to suggest", but nonetheless carefull.
This is not going to be the end of the world as we know it but I think it will take quite some more time before it's behind us.
Cutting rates further isn’t going to protect businesses without footfall from going under - they need propped up on a wide scale until the virus peaks and passes.
Theoretically a cut to zero might help but only if you’re giving guaranteed credit lines to every small business to get them through the worst of it - but how would that even work?
that's what zerohedge calls "the dead cat bounce" right?
Is there any question? 80% of the Chinese workforce has been sitting on the sidelines since mid-January. Production is just barely ramping up and I don't think we'll see full capacity until well into April, provided that COVID19 is truly contained/managed.
Edit: not sure about the downvotes. Here's a source about Foxconn production: https://twitter.com/onlyyoontv/status/1234855310428430337
;P
I jest, but I wonder about the difference between "natural" complex-systems-behavior recessions, and those that come from acute stimulus like war and pandemic.
Something like: is there a difference between people wanting to produce and consume but being "artificially" held back, versus an average lack of confidence in the markets causing slow-down?
Source: Page 12, paragraph 2. https://www.who.int/docs/default-source/coronaviruse/who-chi...
> The median incubation period was 3.0 days (range, 0 to 24.0 days)
Edited my post to include that source
I don't see that supported by the CDC either though
There are several cases where the incubation period has been over 20 days. Maybe 90% of cases incubate for 14 days or less. Maybe 99% for less than 20.
14 days is not some magic limit.
There are case reports of it being far longer than 14 days:
https://www.reuters.com/article/us-china-health-incubation/c...
> A 70-year-old man in China’s Hubei Province was infected with coronavirus but did not show symptoms until 27 days later, the local government said on Saturday, meaning the virus’ incubation period could be much longer than the presumed 14 days.
if this was more like SARS with a 10% IFR, with equally high mortality rates among young people, then I would be very worried. But this virus seems to be the opposite. most factory workers fit in that cohort of people in that the virus effects the least so I don't see supply chains suffering.
I think supply chains are more affected by government attempts to contain the virus (quarantines/social distancing/restrictions on travel and trade) than by the virus itself, no?
It owns close to 80% of the Japanese ETF market currently, with no end to the expansion of balance sheet in sight.
After buying long treasuries, it's not unreasonable to imagine the Fed buying stocks, either individual issues or ETFs. The President would be for it, and it would be hard to drum up any opposition to it in congress.
Not only that, but rates on long treasuries have stayed negative for long periods of time in other countries. It's an open question how negative long treasuries can go, but the evidence suggests we're not even close to the limit.
Recessions are politically unacceptable in today's world. Buy stocks. Buy treasuries. Do so with wild abandon, because the Fed has your back. Just watch out for the moment when the whole thing jumps into reverse and no amount of market manipulation will stop the bleeding.
Our inability to suffer short-term consequences for long-term prosperity is a real issue that we as a country need to figure out how to solve. (Can you solve for human nature?) The fed shouldn't have made cuts in 2019 at the height of the market, we should have let failing banks fail, we need to start spending responsibly if we want to remain a reserve currency, and we need to learn that forest fires clear out the undergrowth for new growth.
The Fed has been much more aggressive than the ECB, and it's why the US recovered faster than Europe.
Edit: ~ "Thomas Jefferson" changed to "~ Someone, supposedly Thomas Jefferson"
* No documentation ties it to its putative originator.
* Its earliest known reference did not appear until long after the death of its supposed originator.
* Multiple sources are claimed for its origins.
* Contextual information indicates the words are of more recent origin than claimed. (deflation/inflation)
1. https://www.monticello.org/site/research-and-collections/pri...
2. https://www.snopes.com/fact-check/bank-shot-2/
One of the “Rules of Misquotation” outlined by Ralph Keyes in his 1992 book on that subject is that axiom that “Famous dead people make excellent commentators on current events.” Given the fear and uncertainty engendered by the current economic situation, and the disgruntlement expressed by many Americans at the thought of providing taxpayer-funded government bailouts to financial institutions and other large corporate entities (such as the auto industry), it was only a matter of time until someone trotted out a quotation (apocryphal or otherwise) from a respected, long-dead figure demonstrating that this whole economic mess was both predictable and inevitable. And one could hardly find a more hallowed figure in U.S. history than Thomas Jefferson to deliver this message, warning us from across the centuries that predatory banks and corporations would eventually impoverish us all. [snopes]
The only way out of this is to get enough cash into the hands of regular people that they can use it to pay down their debts at the same time as interest rates increase to provide the incentive to do that. Either that means the money corporations are warehousing has to somehow get paid out as wages (which would require some kind of major e.g. tax policy change), or some other new money has to be created by the government and not banks (by fiat rather than as debt) and then transferred to regular people via a UBI or similar.
In the meantime we can pretty much keep kicking the can down the road by keeping interest rates low for an arbitrarily long period of time. We could even go further into it, because the lower interest rates are the more debt load people can carry. But that keeps increasing the amount of idle cash in the corporate coffers. Something something wealth inequality.
Oh you mean the economy that has been stagnate for 20 years?
Nobody wants to rip off the band-aid, even if it's infected underneath.
In other words, buy low sell high. Got it. ;)
Your initial paragraph seeks to address point raised by others that FED is running out of ammunition and you list of Japan as an example with other pointing out the price Japan paid for that pollicy.
I suppose FED could buy all US equities on national credit card ( and if you think about it, something similar to it happened only few months ago ), but do you think it is a prudent move?
Maybe a little like subprime leading up to 2008. The problem was written off by just about everyone who bothered to look, until something snapped and it was the only thing that mattered.
We may be seeing the start of this in the repo market, which once again had a convulsion today. I doubt many care about it or really understand it, and that goes double for policy makers.
- Signaling that the Fed is willing to get involved to stabilize market prices (by making capital cheaper) is meant to calm markets and give participants comfort about making decisions today that they could optionally wait to decide. If everyone goes into a holding pattern, liquidity is impacted, which can cause all sorts of unpredictable price movement.
- it is a wealth transfer from one group to another. The beneficiaries are existing debtors (mostly firms) and firms who benefit most from cheaper capital.
- it gives the Fed slightly more influence over the outcome of the 2020 election, since reversal of the Covid-19 rate decrease can be timed to create desirable optics as the election approaches. Much research has been done about the most critical time period prior to the election when "it's the economy, stupid" is most true.
This is devastating.
I actually think the Fed is kind of happy to have a virus as cover for this move.
Fiscal responses (having the government spend actual money, either on things like infrastructure it by just handing it out to the population, which will then largely spend that money as they see fit) rather than monetary policy responses (reduce rates and hope that people will borrow more) are known to work well in most cases.
The Corona virus situation is slightly different than the financial mess of 2008 because it involves actual potential supply constraints. This means that a higher rate of inflation may have to be accepted temporarily. But inflation has arguably been far too low for far too long anyway...
However, if we were to take aggressive action on Climate Change, there’s a lot of potential jobs there. A massive potential stimulus. Also, you know, public funding of basic research which could explore, I don’t know, pandemic response, new therapeutics, etc.
Like you said, ideological barriers are what’s keeping us stuck. But before we went all in on finance we had a pretty epic run last century of productivity fueled by public investment (think 1940-1970).
Do you not need a roof over your head, health insurance, a car, college education, etc? Inflation has been rampant, it's just not apparent in manufactured goods because the actual cost of production dropped rapidly with offshoring and technological progress. Without significant inflation, we would have seen a steady march down of consumer prices, as happened in computing.
Not in Hong-Kong. [1]
[1] https://edition.cnn.com/2020/02/26/economy/hong-kong-budget-...
Not really. This was extensively explored following the Great Depression, in part by Ben Bernanke, which is how we got QE. In summary, the Fed can buy more than just short-dated government bonds.
Moreover, "liquidity trap" doesn't refer to the central bank running out of tools per se. It refers to investors calling a central bank's bluff.
A classic example is a stagflation-facing central bank cutting rates. The cut spurs inflation. Investors figure that will force the central bank's hand into a rate hike shortly. As a result, they hold.
The cut thus fails to have an impact because the bank is perceived to be constrained. That doesn't apply here.
So long as the appearance of inflation never occurs.
As long as other countries do business in USD and keep buying US debt, the party keeps going.
With fiat, you can spend as much as the combined purchasing power of all your citizens through money printing.
When you’re the reserve currency, that pool is extended to the purchasing power of many many countries.
That’s probably why, from a strategic POV, the US must remain the largest military force and continue to police the world.
With dollar hegemony, the US might even introduce new ways (like MMT) of sipping purchasing power of participants.
If a company temporarily can't manufacture something due to supply chain disruption, they could lose a lot of money and might need to borrow some. Getting by until things recover just got cheaper.
I'd guess there are probably similar issues for restaurants, the tourist industry, maybe construction?
But that assumes they're credit-worthy. It wouldn't help a company that can't borrow.
- sick pay for hourly employees for next year
- backstop airlines, event planning and travel businesses in some capacity
- offer Netflix rewards for vaccines, testing methods or other applicable things
- cover cost of insurance for massive testing
He's just trying to stimulus himself a re-election.
After that, yeah then it gets tough, but then again, maybe we get some actual fiscal stimulus which maybe buys the US some China style infrastructure!
The Fed does not keep interest rates low in a vacuum. There is an auction system that determines real rates. If the Fed is not able to sell all their bonds at the target rate, they have to adjust.
In the long run, I think we will see:
1. (at risk of calling this bull market a "new normal") P/E ratios for stock will continue to climb in a secular fashion. Low returns from the alternative investment of bonds will dictate high P/E ratios.
2. Debt financing will remain cheap. Low interest rates signal cash that is desperate to find a place to park it.
3. Government debt will remain popular and affordable. This is a win for Keynesians.
4. Secular low interest rates are an indicator of a stable and mature economy, which is good. The bad part is that they signal a world where obvious available capital investment projects are missing- we seem to have picked the low hanging fruit.
5. Next recession the U.S. will hit the zero lower bound, and we will see lots of QE and/or nominal negative interest rates through some institutional mechanism.
6. Increasing government deficits look better when interest rates are low.
7. Speculative: Deficit spending can increase indefinitely if real interest rates are below 0 (aka nominal rates are below inflation). To put it in other terms: Any deficit spending is free money up until the point that it causes inflation to rise about the nominal interest rate.
To my understanding, there is a real public market, however the Fed essentially manipulates by participating to the degree necessary to achieve the target interest rate. When the overnight repo rate went up, the Fed hopped in to 'fix' the rate. You will never have enough assets to compete with the Fed's goals. They have limitless capacity to participate in the market.
A secular trend is a variable that evidences a consistent pattern within a given period of time. It is a statistical tendency that can be easily identified and it is not subject to seasonal or cyclical effects. (https://www.myaccountingcourse.com/accounting-dictionary/sec...)
What we need are lower interest rates! What we need is to limit immigration from Mexico (even though the US has a higher infection rate and there isn't any talk of limiting flights from, say, England). What we need to do is silence domain experts and have communications controlled by politicians at the White House.
Maybe this rate cut is actually the right thing to do, what do I know? But I have little reason to believe it was made for the right reasons.
Given that the administration choose exactly who leads the FED, they're not exactly independent either.
New gov, same as the old gov?
To use that quote to set up an equivalence between the two administrations is beyond the pale. I think neither Democrats nor Republicans would say the two administrations are alike.
When our economy was doing well, the rates supposed to be increased, now we have very little room to use that to help with recovery.
cynical, but genuinely curious
I like the imagery of fire hydrants spraying water on an issue that is ongoing and unresolved while the vaults become hollow and worth nothing.
Why would this exact scenario regarding growth in the number of cases not play out in the US? The only difference is smaller population, but cities are dense here too.
However, unlike China, I don't think US and other countries will be able to quarantine entire cities.
They only hope IMHO is that the virus becomes less virulent with as summer approaches.
"New data on China that has trickled in over the last few days suggests the damage coronavirus has wrought on the world’s second-largest economy could be worse and more prolonged than previously expected, despite a decline this week in the number of new infections in the country."
[0] https://business.financialpost.com/news/economy/five-signs-t...
I presume the Fed knows this, and what worse is this seems to be due to political pressure.
Finally, when this does not work, it will reduce peoples' faith in the Fed.
People are being too rigid here: this isn't a perfect policy but it's not an inherently bad idea. You use monentary policy to buffer shocks to the economy, and in that regime it's best used early and with agility. I think the Fed is fine here, though I agree that this is a very minor side plot in a much larger story.
One thing that bothers me and I don't see discussed here is how much the market moved ahead of the announcement. It is very alarming that this sort of information leaked ahead of the announcement as much as it did. I would be interested to know how that reached the market.
What would be hilarious/terrible is if this attempt to juice the markets doesn't prevent a sea of red at EOD.
The first order effects weren't so large to stem the selloff (first order meaning the PV effect of lowering discount rate).
As for second order effects (rate cuts to spur economic activity), I'm not even bullish about the mechanism to transmit rate cuts to the real economy normally, but I think in a quarantine situation, those mechanisms are even more diminished as there's less economic activity. Thinking out loud, demand will probably just hit a wall--there's no elasticity here when people are worried about their lives.
The only mechanism that sounds plausible to flow through to the real economy is fiscal. Government buys Pampers, burns them, buys them again. Or keep lowering rates to raise asset prices by a purely mechanical lowering of discount factor.
What short term behavior changes do emergency rate cuts cause to boost the economy? Are there capital projects that can get started in weeks, that were previously shelved because the rates were 0.5% too high, but are now viable? What sort of projects would these be?
Have we actually seen investment though? Or have we seen mostly stock buybacks?
I can't tell if they've just not yet updated that page.
[0] https://www.cmegroup.com/trading/interest-rates/countdown-to...
https://www.marketplace.org/2020/02/18/coronavirus-warnings-...
giant gains are not so important after giant losses, this is just celebrating volatility.
The stock market psychology works on "buy on rumor, sell on news" principle. This is the reason there was a significant rally yesterday, and stocks are in negative territory today.
What the Fed should have done is give signals that they are about to cut interest rates, then give stronger signals, then even stronger signals, then cut interest rate by 0.25% then repeat for the next 0.25%. Markets would have rallied multiple times for each good news signal.
Let me stop you right there - stock market is a multi-agent system with autonomous algorithms making micro decisions, cap managers doing strategic decisions, and everything in the middle. Add a bit of chaos theory. "Buy on rumor, sell on news" is an extremely simplified and naive rational for explaining how a stock market works.
Most theories of how a stock market works have a built-in fallacy. If someone figured out how the stock market fluctuates, it would be ironed out by massive hedges.
I think the Fed understands stock market psychology pretty well.
I think they just didn't have a choice here.
I suppose negative interest rates will let us know shortly!
The Fed funds rate doesn't really do much to near-term mortgage rates (at least it hasn't to me, as a consumer). The market dip in Treasuries (openly traded) depressed yields which drove mortgage rates much lower before the fed acted at all. Lower rates allows buyers to purchase a lot more home than they otherwise would have which has a good chance of being higher than any rise in the market price - especially for less frothy areas.
If you're talking about prices going up as institutional investors buy up property obviously disregard the above as it's a different dynamic.
It isn't going to help, because it doesn't address the actual cause at all -- but it will help heighten the panic
So why cut the rate? Doesn't make any sense.
It's fair to say, that the FED has no clue.
Edit: Trump has loudly and consistently attacked the Federal Reserve for scheming against him and trying to sabotage the economy, something completely unprecedented considering the Fed is famously intended to be independent. He ratcheted up these complaints even further since the outbreak of Convid-19. Then, the Fed takes the unusual step of cutting rates between sessions (for the first time since the start of the Great recession) despite a strong economy.
Edit #2: Now Trump has lashed out again, calling the Fed's move insufficient.
I suggest Iranian, Argentinian bonds if you really want to get that blood flowing.
More or less, this is a deal with an investment bank where they take your money and hold onto it for a fixed term, while watching the level of a stock market index. If the index ever gets above a pre-determined "trigger level", they give you your money back early, with interest calculated at a fixed rate. If it never gets above the trigger level, then at the end of the term, they give you back your money, without interest. Unless the index has fallen below a "barrier level", in which case you don't get all your money back - you lose it in proportion to the fall in the index.
So, it's a bit like investing in the stock market - if the market goes up, you make money, if it goes down, you lose money - but rounded to fixed levels.
Here's an example:
http://www.marianainvestments.com/adviser/contact/view-plan/...
The term is 10 years, the index is the FTSE 100, the barrier level is 70%; there are three options for interest rates and trigger levels, and the safest, option 1, pays 8.55%, and has trigger levels like this:
Year Level
2 102.5%
3 100.0%
4 97.5%
5 95.0%
6 92.5%
7 90.0%
8 87.5%
9 85.0%
10 82.5%
Or, if you think that it will make it to 105% of its current level, you could go for the full-blooded option 3, which pays out 14% per annum.
And bear in mind that a fall in the index only matters at the end of the term. If there's a crash, and the index has fallen to 50% of the current level by year 3, the product keeps running. If the index recovers to 87.5% of the current level five years after that, the product pays out! It literally cannot go tits up.
How long should I wait for the rates to move?
Here's where they stand today based on a survey of lenders, down to about 3.13%: http://www.mortgagenewsdaily.com/mortgage_rates/
All reserves are gone. Imagine trying to climb out of this ditch if something really bad happened (like say a million people die).
1 - The Q1 supply shock is going to be a temporary thing. They'll recover alright after causing some companies to miss their Q1 earnings. If this was the only effect, we would recover just fine here later this year, but...
2 - Coronavirus is just getting started in the US and Europe. If it spreads widely, and unabated, then the those countries will be forced to enact school closures, business closures, etc, which will cause a massive demand shock.
3 - Demand shock will tank airlines, cruises, restaurants, malls, etc. Basically anything that requires groups of people to make money.
4 - Eventually, demand shock will hit corporate balance sheets in a big way. Many corporations (especially in the energy industry) are overloaded with debt [1]. If this goes on long enough, then those companies will go bankrupt.
5 - If enough companies default on their debt simultaneously, then derivatives on corporate debt (defaults) will cause a systemic crisis again [2].
There's no guarantee that this will happen, but if it does it's going to make 2008 look like a joke by comparison.
If it does, we need to do the right thing this time: wind down the banks and let them fail.
For the downvoters:
[1] https://www.nytimes.com/2018/09/01/opinion/the-next-financia...
[2] https://www.wsj.com/articles/in-a-blast-from-a-financial-cri...
This addiction to debt has got to stop, and unfortunately it sometimes takes cold, hard pain for some to learn a lesson.