The Fed’s Final Bullet Hits ‘Em in the Foot
The Fed’s Final Bullet Hits ‘Em in the Foot by David Haggith for The Great Recession
The Fed’s missteps and flip-flops this week tripped up multiple markets. After accidentally announcing their ammo is down to one last bullet against recession, can they be trusted to handle powerful weapons?
Given how the stock market is now trading on nothing but the Fed, it’s no surprise that its heart leaped instantly in the middle of the week when New York Fed President John Williams (a voting FOMC member) said the Fed should respond quickly to recessionary headwinds with its own rate cuts.
Obviously, investors couldn’t care less about drilling into why the Fed should need to respond so quickly any deeper than Williams statement that it should do this because the Fed has limited resources left with which to do anything! The market wouldn’t have shot up if it had any depth of thought.
One might think that admission by the Fed of being in a weak position would actually be concerning. One might think it would actually be alarming after Williams next words in which he estimated the new neutral rate for Fed funds would be somewhere around 0.5%, instead of the 2.25%-2.5% the Fed has currently targeted. If that’s the neutral rate, then setting the Fed’s interest target one notch above zero (their 0.25-0.5% range) in this reserve bank president’s view, will no longer have any stimulative effect. According to Williams, the Fed needs to drop immediately to the zero bound (0-0.25%) in order to fend off recessionary forces.
Again, what he said was any drop to a rate higher than the zero bound will provide no economic boost.
That means the Fed has only one bullet to fire
Williams sees a 0.5% Fed funds target as essential just to maintain the economy where it is. He further indicated this situation is bound to linger a long time. So, that gives the Fed just one shot (one interest-rate cut) to lift the economy without going into the twilight zone below the zero bound.
Fed Vice Chair Richard Clarida chimed in the same day:
You don’t need to wait until things get so bad to have a dramatic series of rate cuts.
A “dramatic series of rate cuts” sounds like a second regional reserve bank president sees drastic action as being in order. It sounded that way to markets, too.