Short-selling returned to Wall Street after 67-year-old Federal Reserve Board Chairman Jerome Powell slashed 50 basis points off the Federal Funds rate, taking the benchmark rate to 1.25%. Instead of spurring a rally, Wall Street sold off again, leaving the Dow Jones Industrial Average at 25, 917.41, losing 785.91 points or 2.94%. While Wall Street didn’t give back every penny of yesterday’s record point gain, it lost 75%, showing the kind of uncertainty that leaves the nation’s biggest funds from going long. When Wall Street lost 13% of its value last week, it made put-option traders [short-sellers] $104 billion. Short-sellers added to that total today, flipping the market back to short-selling. Looming large over Wall Street is the coronavirus, a daunting unknown to Wall Street and the Fed. Looking at the metrics going forward, the Feds’ Open Market Committee [FOMC] met today to slash rates.
Fed officials didn’t want to raise interest rates all last years but had to eventually slash rates three times to keep the economy growing. “At this point, both the magnitude and duration of the economic effects of the virus are highly uncertain,” said Cleveland Fed President Loretta Mester. FOMC officials don’t slash rates unless they’re seeing recession on the horizon. Wall Street generally likes rate cuts but realized the Fed wouldn’t do it unless the economy needed urgent CPR. While Trump’s been hyping “the greatest economy in U.S. history,” the Fed has quietly refuted that idea by raising interest rates. “The action taken by the FOMC can help support confidence and ease financial conditions of indebted households and firms, thereby helping to mitigate potential demand-side impact of the virus,” Mester said. What Mester’s not saying is that Fed’s concerned about recession in 2020.
Almost 12 years ago, former Fed Chairman Ben Bernanke slashed interest rates to zero-to-a-quarter-percent Dec. 16, 2008 to stave off what looked like the Great Recession. Meeting today to slash rates, the FOMC sends Wall Street a desperate message that worries about the coronavirus could sink the U.S. economy. Powell said the 50 basis points cut was needed to “help keep the U.S. economy strong as we meet this challenge,” signaling to markets that Covid-19 is having a serious impact on the U.S. economy. Mester admitted that the Fed’s rate cut won’t solve supply chain problems or the crushing slowdown to the tourism industry. Today’s 10-year U.S. Treasury Rate plummeted to 1.01%, the lowest in history. If trends continue Treasury rates could go negative, creating havoc in the bond market. Negative interest rates are already a problem in Europe and Asia.
Powell could have started a new round of quantitative easing, where the fed adds to banking cash reserves by buying back treasuries. Slashing rates could backfire on the Fed, driving interest rates to unsustainable levels. “It was within the context that I supported today’s interest rate reduction, while recognizing that appropriate actions taken by other parties, including global public health officials and fiscal authorities, would likely do more to support confidence,” Mester said. Mester said nothing how the Fed’s interest rate cut could drive interest rates in the negative direction. Mester opposed Powell’s three 25 basis point cuts in 2019, thinking it wasn’t needed. She readily signed on to today’s 50 basis point rate cut. Mester thought in 2019 that resolving the trade war with China would be enough stimulus to keep the economy growing. Today’s rate cut shows that Mester sees the economy as stalled out.
Fed’s actions today are bad news for 73-year-old President Donald Trump who’s running a platform of effectively managing the U.S. economy. While Trump can’t be blamed for the coronavirus, it’s clear that there’s a disconnect between what Trump calls the “greatest economy ever” and today’s draconic measures by the Fed. There’s no denying that the FOMC sees the economy as slowing down or they wouldn’t approve major rate cuts. While tomorrow could be different, Wall Street’s reaction today was one of disbelief, triggering a new round of short-selling. Short-sellers took over the market last week driving down market averages 13% into correction territory. When Wall Street leaped ahead yesterday 1,290 points or 5.10%, investors though they were out of the woods. Today’s sell-off shows Wall Street’s a long way from the confidence to reposition long-term investors.
Meeting in emergency session is never good news for the FOMC, trying to stave off more economic bad news. Whatever one hears on the campaign trail, it’s a different story when the Federal Reserve Board takes urgent actions to save the economy. Slashing the Federal Funds Rate 50 basis points, has already had negative consequences on the 10-year Treasury Bond, now at its lowest level in history. Alianz SE economist Mohamed El Erian warned the Fed Aug. 19, 2019 about slashing U.S. interest rates, causing rates to go negative. With the 10-year Treasury at 1.01%, U.S. rates are getting dangerously close to negative. “The European Central Bank made that mistake and they can’t get out of it,” El Erian said about negative interest rates. “And the Fed has to be careful not to make that same mistake.” Looks like Powell fell into the trap, slashing the Federal Funds Rate 50 basis points today.
