Mutual funds giant Vanguard issued a rare rebuke after the Federal Reserve’s surprise interest rate cut Tuesday, saying the move was coming too soon and represented a “high-risk bet.”
The decision to cut interest rates “was premature, given the lack of data suggesting a significant drag on the economy,” Roger Aliaga-Diaz, Vanguard’s chief economist for the Americas, said in a statement. "The high uncertainty around the potential implications of the coronavirus warrant further assessment before taking action of such magnitude.”
The Vanguard economist warned that the rate cut could “send the wrong signal to market participants, including individual investors who are concerned with recent market volatility."
Aliaga-Diaz added in the statement: "This also creates uncertainty around the Fed’s framework for monetary policy decisions following market dislocations. This is a rare measure last leveraged during the global financial crisis in 2008. Based on the economic and virus-related data available today, we feel this is a high-risk bet. The Fed may find themselves in a difficult position should conditions deteriorate further, finding themselves required to act forcefully in the weeks ahead.”
Other investment professionals disagreed on the effectiveness of the rate cut, which put the rates in a range of 1 percent to 1.25 percent, with some believing the rate cut actually scared mom-and-pop investors more than it reassured them.
Below is a sampling of opinions:
“The Fed’s rate cut is a psychological palliative but I have severe doubts it will make a difference to economic growth going forward,” said Daniel P. Wiener, chairman of Adviser Investments. “The rate cut is not going to drive consumers out of their homes and into the malls if they fear contagion. It isn’t going to get them to buy cruises or airplane tickets either. I think the Fed panicked."
“Today’s move by the Federal Reserve to cut interest rates 50 basis points (0.50%) is clearly a step in the direction of helping global commerce deal with the economic fallout from how people respond to the viral threat," wrote Francis Scotland, director of Global Macro Research, Brandywine Global. "Nonetheless, economic stabilization may not be possible before there is a reason to become more optimistic about the virus threat itself: reduced number of case levels, stabilization in cases inside and outside of China and/or rapid development of a vaccine. In the meantime, Fed Chair Powell indicated during his press conference that the G-7 authorities are acutely aware of the potential cash-flow issues facing broad swaths of the private-sector economy as activity levels slow. The willingness to convert this awareness into practical financial support will become more important the longer the viral drag to the economy persists.”
“To me, there was uncertainty at 10 a.m. and there’s still uncertainty now," wrote Tom Kozlik, head of municipal credit and strategy at Hilltop Securities. “My job is to make it so we’re going to land at some point, we can’t see the horizon. It’s a flight analogy; they’re flying upside down and we’re going to land sometime.”
“I believe it to be a psychological message to support the economy as the 0.50% reduction in the Federal Funds rate will not improve issues with supply chains," wrote Mike Keim, president, Univest Bank and Trust Co. "In addition, this was a proactive move as the economy is still strong today. … The issue is what will happen if supply chains aren’t freely flowing in a couple of weeks.”
Hank Smith, Co-CIO of Haverford Trust, says the Fed is catching up to the stock market. “Look at this positively and say, Jay Powell isn’t sitting on his heels. He’s paying attention to the market. He did it in 2019. He could have easily dug in his heels and not cut rates. This will grease the recovery quicker than if they had waited three months to cut rates. There’s no inflationary risk to doing this.” He believes another cut may come either this month or in April, perhaps another 0.25%.
Another easy fix? “Get rid of the China tariffs. It’s a quick way to give the middle class a tax cut.”
David Rosenberg, chief economist & strategist of Rosenberg Research and Associates: “As we all talk about the Fed today, remember that the Australian market sold off after the RBA [Reserve Bank of Australia] cut. Classic case of “sell the fact” after “buying the rumor.” And a gnawing realization that these central bankers are out of ammo.”
Julia Coronado, president and founder, MacroPolicy Perspectives: “Honestly, the Fed can’t save the day here with rate cuts. We are going to need a competent and coordinated response from public health and fiscal policy. Lack of information is not helping firms and households form expectations and make plans.”
Joel Naroff, Naroff Economic Advisors: “Chair Powell indicated he knew that monetary policy would not change economic fundamentals, but he was acting to boost confidence. He was right in recognizing that monetary policy is limited in the current situation but may have been all wrong when he thought he was boosting confidence. First of all, you cannot fight a virus with rate cuts. The economy will slow because of the actions taken to fight the spread of the virus and those actions will not change because rates are lowered. Indeed, it is hard to believe the Fed members actually think rate cuts will induce greater business or consumer spending. I have no idea what the reaction function is that goes from rate cuts to better economic activity when the problem is an epidemic.
Instead, it looks like the Fed, as it did starting at the end of 2018 and all through 2019 when it reversed direction and started cutting rates, is targeting not the real economy but the financial economy. For the past year, I have written that the Fed seems to have a triple mandate that includes not just growth and inflation but the equity markets. This move seems to be targeted at the equity markets, as it is not likely to do anything to either growth or inflation."
WalletHub projects that the rate cut will affect consumer financial products:
• Rate offers on new credit cards will decrease by an average of 0.08%.
• Auto loans rates will decrease by an average of 0.08%.
• Mortgage rates will decrease by an average of 0.26%.