FEDERAL RESERVE POWERLESS; GOLD PRICES RISE WHILE STOCKS PLUMMET
Federal Reserve Powerless; Gold Prices Rise while Stocks Plummet
The limits of Federal Reserve’s power were on full display on March 3 when the U.S. central bank took the extraordinary step of chopping its key interest rate by half a percentage point in an effort to limit the economic damage of the spreading coronavirus. It was the first time since the 2008 financial crisis that the Fed surprised the markets between regularly scheduled policy meetings by cutting the rate at which banks borrow overnight money.
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But if the surprise move was meant to reassure the markets, it seemed to have the opposite effect. After a brief pop higher, the Dow Jones Industrial Average plummeted as much as 1,300 points, as some investors worried the Federal Reserve might be taking such a drastic step because it foresees severe economic damage resulting from the virus. The Dow closed the day down nearly 800 points. “What are they seeing that we aren’t?” Kevin Preloger, portfolio manager at Perkins Investment Management, told The Wall Street Journal.
As much as the U.S. central bank tries to support the economy, the fact is lower interest rates can do nothing to limit the spread of COVID-19, and the way businesses respond to it.
“We do recognize the rate cut won’t reduce the rate of infection,” Federal Reserve Chairman Jerome Powell conceded, though he said he believed the move would “provide a meaningful boost to the economy.”
Lower interest rates make it easier for cash-strapped companies to borrow so they can stay afloat in turbulent waters. But COVID-19 is triggering a supply shock to the global economy, with factories and offices, particularly in China, shut down. This will likely inflict damage on numerous industries that depend upon suppliers in the Far East, which is leading economists and investment strategists to lower their forecasts for the year.
In contrast, gold, yet again, is proving to be the globe’s most reliable safe haven. As stocks plunged in response to the Fed move, gold closed the day up 2.6 percent.
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