Fed Should Be Decisive
By the time you read this, the Fed may already have cut rates. That is the situation we find ourselves in given the recent correction in equities, which were at a record high only eight trading days ago but were down 12.8% from that peak as of the market close on Friday.
Fears about the economic effects of the Coronavirus have driven equity prices lower and led to calls for the Federal Reserve to cut rates. But we think a rate cut – any rate cut – would be a mistake. Nominal GDP – real GDP growth plus inflation – is up 4.0% versus a year ago and up at a 4.4% annual rate in the past two years. These growth rates suggest short-term interest rates should be higher, not lower. If people become less productive because they’re scared of getting sick, lower interest rates won’t change that.
Part of the problem is that the Fed spent much of 2019 agonizing over potential trade wars and Brexit, resulting in three rate cuts of 25 basis points each. Yet, in the end…