Vincent Reinhart, Mellon chief economist and macro strategist, says he’s “at a loss” to justify Tuesday’s emergency rate cut by the Federal Reserve, which only ended up spooking investors even more.
Amid growing concerns surrounding the COVID-19 viral outbreak, voting members of the Federal Open Market Committee unanimously agreed to an inter-meeting rate cut by half a percentage point — the first inter-meeting cut since the 2008 financial crisis. Stocks whipsawed on the unexpected move.
Reinhart said in an interview on Yahoo Finance’s that “historically, the FOMC is reluctant to do an inter-meeting move on the fears that it looks like it’s panicking, that it conveys concerns about the economy from some insider knowledge, it feeds suspicions that it’s responding to equity moves, and lastly that it feeds suspicions that it was influenced by political actors.”
Reinhart added that the Fed “basically went four for four” on those concerns, which were reinforced by Fed Chair Jay Powell’s “pretty underwhelming” press conference that also failed to provide a rationale for the cut.
“He did talk about business contacts, which I think led some people to wonder if they knew something we don’t. They did it a week after equity prices fell 11%,” Reinhart told “On the Move.”
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Given that Powell called the meeting right after meeting with the Treasury Secretary, “I could understand why equity investors are somewhat perplexed,” Reinhart said.
The economist dismissed the idea that the Fed has to act early and aggressively on rate moves to hedge against what’s around the corner, because rates were already at low levels.
“That’s page one in the talking points on how to deal with the zero lower bound nominal interest rates,” he said. “If you think you’re going to get a persistent adverse demand shock that could risk putting you at zero, the go low as quickly as you can because the economy will be in a better position at that juncture. The problem is that is when you believe you are going to have a persistent adverse hit to aggregate demand.”
Reinhart pointed out that most economic analyses of the impact of the coronavirus talk about a ‘V-shaped’ recovery — something that looks unlikely.
“The coronavirus is expected to impart a V-shaped dent in global activity, albeit deeper and more asymmetric than we might have thought a few weeks ago. But the funds rate appropriate for the downward leg is not the same as for the upward one,” he said.
“That’s particularly going to be a problem because what you have to explain to me is how the Fed could take this back in the course of 2020, an election year?” he added.
Julia La Roche is a Correspondent at Yahoo Finance. Follow her on Twitter.
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