17 Mar. 2020

Today, the Federal Reserve slashed its benchmark interest rate by 100bps. Until July 2019, Fed raised the rate 9 times. However, re-introduced zero-rate.

Fed also mentioned that it would buy $700 billion in Treasury and mortgage-backed securities (MBS) in an urgent to bid to prevent market disruptions.

The Fed was pushed through this emergency rate cut for the first time since Global Financial Crisis in 2008, due to the fear of the US economy falling into recession by coronavirus. The rate cut will shut off current US liquidity squeeze to real economy in short term.

However, was this emergency rate cut really needed?

If you refer cases of natural disasters and World Wars, US economy was not always vulnerable to shocks. Also if you refer all the indexes going into the coronavirus crisis, US economy was not in the state of vulnerability.

Unfortunately, Fed's rate cut used up one of valuable options that it will need when recession happens, rather than a market correction. Furthermore it now shows that US economy is following Japan, who introduced negative rate and continue to buy huge amount of Treasury and MBS, still in their fifth recession since 2008.

The most important point is that Fed cannot solve the real problem. As Jerome Powell mentioned today "Primarily medical professionals and, secondarily fiscal policymakers" to solve the problem.