Coronavirus Prompts Fed to Slash Interest Rate - Stocks Slide, Gold Spikes, Bitcoin Uncertainty
The U.S. Federal Reserve slashed interest rates by 50 bps on Tuesday citing concerns about the coronavirus outbreak against the bleak economy. The last time the central bank slashed rates by leveraging an “emergency rate shift” by half a percentage point was after Lehman Brothers filed for bankruptcy in 2008. The announcement didn’t have a favorable effect on the stock market and the Dow shed close to 800 points after Fed Chairman Jerome Powell announced the cut.
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50 bps: The Federal Reserve’s First Emergency Rate Cut Since 2008
It’s safe to say that global markets have been shaken by the coronavirus crisis and governments and central banks worldwide are reacting. Last week U.S. stock markets were extremely bloody and assets like precious metals and cryptocurrencies took a hit too. On Monday the Dow Industrial Jones saw a 1,200-point advance as it seemed like a recovery was on the cards.
However, on Tuesday as coronavirus fears continued to extend across the globe, the U.S. Federal Reserve cut interest rates by 50 bps and explained it was due to the coronavirus crisis and the overall “outlook” of the economy. Almost immediately after the Fed’s announcement, all three major stock indices dropped significantly percentage-wise and the Dow lost close to 800 points.
“We saw the risk to the outlook to the economy and chose to act,” Powell told reporters on Tuesday. “I don’t think anybody knows how long it will be,” he added. “I know the US economy is strong and we’ll get to the other side of this and return to solid growth and a solid labor market as well.”
Lehman Brothers Crash, 9/11, and ‘Undermined Confidence’
Since September 2019, the Fed has been feeding private banks with billions in overnight repos and it has cut rates three times already but not nearly as much as Tuesday. In fact, the last time the Fed cut rates by half a percentage point was during the 2008 economic crisis. One month before the “emergency rate shift” on September 15, 2008, the U.S. saw the largest bankruptcy in the country’s history. Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy and the Fed decided to take action. Roughly three weeks later on October 8, 2008, the Fed used an emergency rate shift and cut rates by 50 basis points (bps) to 1.5%. “The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures,” the Federal Open Market Committee explained at the time.
Of course, the Fed did more than just that as they opened the floodgates of quantitative easing and stimulated private banks while the taxpayers had to foot the bill. 2008 saw massive bank bailouts and the Fed ultimately slashed the interest rate as low as 0.25%. Prior to the Lehman Brothers collapse, the Fed cut rates on January 22, 2008 by 75 bps and 50 bps in August 2007.
It was six years before the 2008 financial crisis when the central bank slashed interest rates by 50 bps because of the 9/11 attacks. On September 17, 2001, a few days after the World Trade Center bombings, the Fed told the public the central bank would offer “unusually large volumes of liquidity.” The Fed’s interest rate cut of 50 bps on Tuesday didn’t have much of a favorable outcome on the New York Stock Exchange and Moody’s Analytics Chief Economist Mark Zandi said it “undermined confidence.”
“Cutting rates was the right policy choice, certainly the right thing to do, but doing it the way they did was a mistake,” Zandi explained during an interview on Tuesday. “Certainly we know that in hindsight,” Zandi added. “It didn’t do what it was supposed to do and that was instill confidence. It, in fact, undermined confidence.”
Gold Prices Soar
Following the Federal Reserve’s surprise interest rate cut on March 3, the price of the precious metal gold surged by $49 on Tuesday to $1,638 an ounce. Economist and gold bug Peter Schiff commented on the Fed’s move and said: “Lower interest rates will do nothing to alter coronavirus related consumer behavior.”
“The Fed’s real concern was the reverse wealth effect lower stock prices would have on consumers and the economy. So the rate cut was not really about the coronavirus, but the stock market,” Schiff added. Schiff also got some press for predicting the current economic downturn and the 2008 financial crisis as well. While gold investors were pleased with the price of gold spiking after the Fed’s announcement, cryptocurrency markets remained lackluster.
Cryptocurrencies and Coronavirus
Crypto markets did erase some gains on Tuesday but not nearly as close as the lift gold saw. While there are some people who believe a financial crisis would be good for BTC prices and the Fed’s surprise cut was a cherry on top, other speculators believe the opposite. A survey from the Twitter account Crypto Kanoon says: “There is a common narrative floating in the industry that coronavirus will take the stock market down hence it will lead to [a] bitcoin pump. Is there a correlation between [the] stock market and crypto?” There are four answers that could be picked which include: “stocks up and BTC down, stocks down and BTC up, it is random, and no correlation.” With over 630 votes and more than 37.4%, the “no correlation” choice led the vote, but “stocks down and BTC up” followed slightly behind.
Blockchain angel investor Qiao Wang also discussed BTC’s performance during a possible global recession. “Sorry to put a pin in the bubble, but Bitcoin traded like an absolute sh**coin over [the] last couple of weeks,” Wang tweeted. “If you are a crypto business or hold a large amount of crypto, you should probably start thinking about hedging against a mild global recession.” Wang added:
Every short-term time frame I look at, be it 1 minute, hourly, or daily, Bitcoin looks depressingly correlated with [S&P 500]. I’m not saying Bitcoin will necessarily get crushed by a mild recession, but you probably want to update your Bayesian probabilities.
Former Bitcoin Foundation director Bruce Fenton tweeted the situation as well. “I’d take some crypto off the table until this shakes out — Even Bitcoin will likely be hit by this — Long term fundamentals should be solid still,” Fenton stressed. “The use case of limited supply money could be even more appealing. But a speculative and volatile asset will have a hard time,” he added. Still, there are many people that believe BTC will perform as well as gold has in the last few days or fulfill everyone’s uncorrelated asset theories.
“[S&P 500] and Google Trends for ‘coronavirus’ are almost mirror images of each other – SPX is nearly completely tied to coronavirus fear — r = -0.9,” tweeted Cane Island Alternative Advisors’ Timothy Peterson. “Bitcoin is [the] least correlated (-> BTC doesn’t care). Gold has been the best hedge: +0.6 correlation.”
What do you think about the Fed’s interest rate cut and the effect on the stock exchange on Tuesday? What do you think about cryptocurrencies and how they will perform if the world is hit by a financial crisis? Let us know what you think about this subject in the comments section below.
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Images credits: Shutterstock, Twitter, Fair Use, Jerome Powell, Wiki Commons, goldprice.org, Google stocks, CNBC, and Pixabay.
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