Fed Cuts Rates, But It’s Not Clear Why: How Do Lower Rates Address Virus?

The Federal Reserve Open Market Committee voted unanimously to cut overnight interest rates by 0.50%, to a range of 1.00% to 1.25%. In his comments after the rate change was announced, Fed Chair Jay Powell said he was confident the move would stabilize the economy, although no one seems clear on how that will work.

Will lower rates stem the tide of the coronavirus, or somehow convince people it’s safe to congregate in public places? That seems like a stretch.

It’s more likely the Fed fell victim to the old Russian proverb, “When all you have is a hammer, everything looks like a nail.”

The latest Fed move might generate a little inflation, but only if the virus scare fades quickly. So far, that’s not looking likely.

Unfortunately for savers, the latest Fed move is likely to make you ill even if you don’t contract the virus. After the Fed action, the 10-year U.S. Treasury bond yield dipped below 1%, and the 30-year bond traded at 1.63%. An investor who put $1 million in 30-year U.S. Treasury bonds would earn a whopping $16,300 per year, and that’s before taxes.

 

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