6 votes

Trump says he could demote Fed chair Powell, risking more market turmoil

22 comments

  1. [22]
    envy
    Link
    One day later, the Fed announced emergency measures, bringing the fed funds rates down to 0-0.25% They could have waited until the next FOMC meeting, which is all of two days away. Traditionally,...

    One day later, the Fed announced emergency measures, bringing the fed funds rates down to 0-0.25%

    They could have waited until the next FOMC meeting, which is all of two days away.

    Traditionally, the Fed is independent of the president, because obviously every president wants low rates in election year, but bad things happen if you let presidents dictate rates.

    US President Donald Trump said the emergency action "makes me very happy".

    It's not making the stock market very happy, looks like the futures market already hit the after hours 5% breaker

    7 votes
    1. [21]
      skybrian
      Link Parent
      Although it certainly doesn't help, it's not clear that Trump's blather actually had much to do with current market conditions or with the timing of the Fed's announcement. Their last announcement...

      Although it certainly doesn't help, it's not clear that Trump's blather actually had much to do with current market conditions or with the timing of the Fed's announcement. Their last announcement was between meetings too.

      To me the drop in interest rates seems timely. Bad news built up over the weekend. The Fed was widely expected to drop the interest rate to 0 and it was already built-in to some prices. Why wait?

      3 votes
      1. [4]
        envy
        Link Parent
        Why go to zero? Why not another 50 basis point drop? They have used up all their bullets. What's next?

        Why go to zero?

        Why not another 50 basis point drop?

        They have used up all their bullets. What's next?

        4 votes
        1. [3]
          skybrian
          Link Parent
          Looks like quantitative easing, like before. Basically, buy what other people are selling. Already starting.

          Looks like quantitative easing, like before. Basically, buy what other people are selling. Already starting.

          2 votes
          1. [2]
            envy
            (edited )
            Link Parent
            It is indeed QE4. But what else is left? There is not much else the Fed can do. Why go all in now and save nothing for later? I think Trump did indeed influence the Fed.

            It is indeed QE4. But what else is left? There is not much else the Fed can do.

            Why go all in now and save nothing for later? I think Trump did indeed influence the Fed.

            3 votes
            1. skybrian
              Link Parent
              Yeah, honestly, a "helicopter drop" (giving out free money to everyone) would be a really good idea, but that's up to Congress. Of course I would say that as a supporter of basic income, but in...

              Yeah, honestly, a "helicopter drop" (giving out free money to everyone) would be a really good idea, but that's up to Congress.

              Of course I would say that as a supporter of basic income, but in times like this more conservative economists will recommend it too, as a temporary measure. Here's one example.

              4 votes
      2. [16]
        SantalBlush
        Link Parent
        What do you believe this move by the Fed was supposed to accomplish?

        What do you believe this move by the Fed was supposed to accomplish?

        1. [6]
          envy
          Link Parent
          We are likely in a recession. There is a supply shock, as our manufacturing source (China) effectively shut down. There is also a demand shock, as consumers are staying home. Normally the fed...

          We are likely in a recession. There is a supply shock, as our manufacturing source (China) effectively shut down. There is also a demand shock, as consumers are staying home.

          Normally the fed lowers rates during a recession, and the recession gets fixed.

          Normally however, the Fed is the cause of the recession. The Fed typically raises rates to fight inflation. So if raising rates causes the recession, lowering rates typically fixes the recession.

          This case is different. The fed is hoping zero rates lower the severity of the recession, but they have been saying for a while now that the government will need to step in with fiscal stimulus during the next recession. Japan has been at negative rates for a while now, and their economy has gone nowhere.

          4 votes
          1. [3]
            grahamiam
            Link Parent
            Which recessions would you say the Fed "caused"? That seems like a bold claim.

            Which recessions would you say the Fed "caused"? That seems like a bold claim.

            2 votes
            1. [2]
              envy
              Link Parent
              The last eight or so. Inflation heads above 2%, the Fed has to increase rates. The fed increases rates too much, you get yourself a recession. You can see it play out here:...

              The last eight or so. Inflation heads above 2%, the Fed has to increase rates. The fed increases rates too much, you get yourself a recession.

              You can see it play out here: https://fred.stlouisfed.org/series/FEDFUNDS

              The line is the fed funds rate. Shaded areas are the recessions.

              3 votes
              1. skybrian
                Link Parent
                That's sort of a given because if the Fed saw a recession coming they would lower rates and they didn't, but I think all that proves is they can't predict the future and there are often surprises....

                That's sort of a given because if the Fed saw a recession coming they would lower rates and they didn't, but I think all that proves is they can't predict the future and there are often surprises.

                There is one exception: for the 1982 recession, Volcker did it deliberately to kill inflation dead.

                3 votes
          2. [2]
            SantalBlush
            Link Parent
            Thanks, but I was asking the other commenter because "Why wait?" seems to imply that this was an obvious choice to mitigate an oncoming recession, when it is anything but that. As you say, this is...

            Thanks, but I was asking the other commenter because "Why wait?" seems to imply that this was an obvious choice to mitigate an oncoming recession, when it is anything but that.

            As you say, this is largely a supply shock, and the markets need to reflect that reality. This rate cut just seems like an attempt to inflate asset prices.

            1 vote
            1. envy
              Link Parent
              Ahhh, sounds like I should be the one asking you questions.

              Ahhh, sounds like I should be the one asking you questions.

              1 vote
        2. [9]
          skybrian
          Link Parent
          I am not a financial expert and don't really know. But I was thinking that normally, the stock market goes up when rates are cut. So, maybe some good news to offset a lot of bad news and keep the...

          I am not a financial expert and don't really know. But I was thinking that normally, the stock market goes up when rates are cut. So, maybe some good news to offset a lot of bad news and keep the stock market from falling too much?

          I don't know how much else you know so I'll try to explain the basics:

          Timing aside, an interest rate cut is about making it easier to borrow money and refinance loans. It takes some of the pressure off for businesses that have debt with variable interest rates. (And consumers too if they have debt with a variable interest rate.)

          There are a lot of projects where a business borrows money to build something and it takes a while before they see any profit. (Like, for example, a real estate developer.) If loans are expensive, any delay costs a lot of money. And with coronavirus and a recession, there are likely to be unexpected delays in half-finished projects. These delays are less costly if you borrow at a lower rate.

          There are also other reasons why a delayed project costs more, and without money coming in, companies have to borrow.

          2 votes
          1. [8]
            SantalBlush
            Link Parent
            If the Fed props up the stock market with rate cuts and QE, it's creating a bubble, plain and simple. You're not wrong about lower rates increasing borrowing, but think about it: that still...

            If the Fed props up the stock market with rate cuts and QE, it's creating a bubble, plain and simple. You're not wrong about lower rates increasing borrowing, but think about it: that still doesn't touch the underlying problem, which is that factories and stores are closing their doors while this thing blows over. The best way to help the economy right now is for the US government to mitigate the actual problem (a pandemic) and roll out a concrete plan for restarting business operations.

            Those are my two cents, anyway. I think this problem isn't fixed by monetary or fiscal policy, but rather by the government doing its job and slowing the spread of this thing.

            2 votes
            1. [7]
              skybrian
              Link Parent
              Well, hopefully both. The government can do more than one thing, and the Fed's job is to worry about the economy. There are some businesses that are basically sound under normal conditions and...

              Well, hopefully both. The government can do more than one thing, and the Fed's job is to worry about the economy.

              There are some businesses that are basically sound under normal conditions and they should recover after this is over, if they get more time, and a low-interest loan buys you time. There others that wouldn't make it anyway.

              At this point we don't really know the difference. But even if we did, do you really want more people to get laid off now? The time to think about deflating a bubble is not in the beginning stages of a crisis.

              1 vote
              1. [6]
                SantalBlush
                Link Parent
                That's not the point. The Fed handles monetary policy only; it doesn't have the right tools to fix every economic problem. The economy is not struggling due to a credit crunch. This is an entirely...

                Well, hopefully both. The government can do more than one thing, and the Fed's job is to worry about the economy.

                That's not the point. The Fed handles monetary policy only; it doesn't have the right tools to fix every economic problem. The economy is not struggling due to a credit crunch. This is an entirely different situation from 2008.

                So when the Fed tries to intervene, the effect of its policies can vary substantially. Sometimes a rate cut can result in, say, a 40% improvement to the economy (to simplify a lot), or a 5% improvement, or it can even cause more harm than good, depending on the cause of the downturn.

                1. [5]
                  skybrian
                  Link Parent
                  There will certainly be a recession, and the Fed's effectiveness does vary. But it could also be worse if the Fed didn't act.

                  There will certainly be a recession, and the Fed's effectiveness does vary. But it could also be worse if the Fed didn't act.

                  1. [4]
                    SantalBlush
                    Link Parent
                    It could be better if the Fed didn't act. This is my point.

                    But it could also be worse if the Fed didn't act.

                    It could be better if the Fed didn't act. This is my point.

                    1. [3]
                      skybrian
                      Link Parent
                      Okay, but I'm not buying your argument, partially because your supporting facts don't seem to be true. There are signs of a credit crunch. I will start a new topic with one article.

                      Okay, but I'm not buying your argument, partially because your supporting facts don't seem to be true. There are signs of a credit crunch. I will start a new topic with one article.

                      1. [2]
                        SantalBlush
                        Link Parent
                        Of course you don't buy my argument. You don't understand the role of monetary policy and how it fits within the larger toolbox of economic controls. There are plenty of examples of when cutting...

                        Okay, but I'm not buying your argument, partially because your supporting facts don't seem to be true. There are signs of a credit crunch. I will start a new topic with one article.

                        Of course you don't buy my argument. You don't understand the role of monetary policy and how it fits within the larger toolbox of economic controls. There are plenty of examples of when cutting rates is ineffective or is a bad idea, like when it causes inflation or a liquidity trap. An interest rate cut is not a panacea for economic downturns, and the fact that you think it is raises a red flag.

                        1. skybrian
                          Link Parent
                          Hey, I don't actually disagree with much of that. Let's not make this disagreement seem bigger than it is? I do know about liquidity traps. (Consider Japan.) I don't think interest rate cuts are a...

                          Hey, I don't actually disagree with much of that. Let's not make this disagreement seem bigger than it is?

                          I do know about liquidity traps. (Consider Japan.) I don't think interest rate cuts are a panacea. (Quantitative easing is itself an alternative, and I don't think that's a panacea either.)

                          My position, or really, assumption, is that an interest rate cut might not be very effective, but probably doesn't hurt, particularly in a crisis. You seem to think it's counterproductive and I disagree with that part, so I'm curious about how you think that part works.

                          1 vote