Mutual funds giant Vanguard issued a rare rebuke after Federal Reserve's surprise interest rate cut Tuesday, saying the move was premature and a "high risk bet."
The decision to cut interest rate "was premature given the lack of data suggesting a significant drag on the economy," Roger Aliaga-Diaz, Vanguard's chief economist for Americas region, 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, from 1.50% to 1.00% in short term rates, with some believing the rate cut actually scared mom-and-pop investors more than it reassured. 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."
"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 ... 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." Francis Scotland, director of Global Macro Research, Brandywine Global.
"To me, there was uncertainty at 10:00 am and there's still uncertainty now. 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." Tom Kozlik, head of municipal credit and strategy at Hilltop Securities.
"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. 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." Mike Keim, president, Univest Bank and Trust Co.
Economists weigh in
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 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."
Consumers
WalletHub projects the rate cut will affect consumer financial products:
_ Credit Cards: APRs on new credit card offers will decrease by an average of 0.08%.
_ Auto Loans: APRs will decrease by an average of 0.08%.
_ Mortgages: APRs will decrease by an average of 0.26%.
_ Deposit Accounts: APRs will decrease by an average of 0.16%.
