Why the Federal Reserve Board’s Interest Rate Cut Won’t Work
The Federal Reserve Board cut the Federal Funds Rate by a full percentage point on Sunday, March 15, 2020, in an attempt to support the economy. Cutting interest rates won’t work because the COVID-19 pandemic is, at its core, a public health crisis, not a financial crisis.
The Federal Reserve Board’s solution is like giving an Aspirin to a cancer patient. A Band-Aid does not cure the underlying disease. Cutting interest rates does not address the job loss and economic interruption in the entertainment, dining and travel industries.
The Federal Reserve’s approach is understandable. When you have a hammer, everything looks like a nail. But, hammers don’t help when you need to fix your computer.
Things are going to get worse before they get better.
Disease outbreaks create fear. Fear of the unknown. Fear of a lack of control over one’s destiny.
There will continue to be shocks to the economy and volatility in the stock market as the number of Coronavirus cases and deaths continue to climb. At some point a famous person will die of COVID-19, raising the profile of the disease even further. It will make the pandemic seem more real to the public.
The financial problems will not resolve until progress is made on dealing with the novel coronavirus. Good news will cause stock prices to increase, just as bad news causes a sell-off.
Key milestones will include the following.
- Test kits become widely available
- A highly-accurate rapid diagnosis test kit is developed
- Consistent, correct, transparent and frequent communication from experts including social media and news media, helps stop the spread of rumors and false information
- Experts also provide the public with practical tips on what people can do to protect themselves from infection, such as social distancing and frequent hand-washing
- Congress will pass a fiscal stimulus package in addition to emergency aid
- Toilet paper and hand sanitizer are once again stocked on store shelves without running out of the supply during the day
- Improved containment of new outbreaks helps “flatten the curve” and slows the rate of new infections. This will involve reducing opportunities for amplification of the spread.
- Steps are taken to isolate high-risk people from contact with infected individuals. Since the Coronavirus is contagious before people start showing symptoms, nursing homes and senior living communities will ban all outside visitors.
- The number of new infections starts decreasing in the U.S. and worldwide
- The number of new deaths starts decreasing a few weeks later
- Vaccines undergo phase I, II and III clinical trials
- The FDA approves accelerated testing of vaccines
- Travel bans are lifted
- Large venue entertainment events resume
- Elementary, secondary and postsecondary schools reopen
- Antiviral drugs are developed that show some efficacy in treating COVID-19 patients
If your income is being impacted by the coronavirus, you may be able to pause or lower your student loan payments. With interest rates at an all-time low, you can consider refinancing private student loans to lower your interest rate. Keep in mind the pros and cons of refinancing, including the loss of federal benefits for refinancing federal loans (i.e. income-driven repayment plans, deferment options, and student loan forgiveness).