Despite what the consensus believes – that the FED is trying to allay fears related to coronavirus – the reality may be far worse. The FED sees much more data that the rest of us, and to me they’ve just confirmed what I’ve been saying – a recession is underway. The 50 basis point surprise cut suggests the data is looking so sour that they couldn’t even wait a couple of weeks for their scheduled meeting.
The cut will be devastating for banks (already wrestling with skinny margins) who’s balance sheets are unprepared. The FED would have know this and acted anyway.
The the data related to U.S. manufacturing (see chart) just keeps getting worse. Just how bad things are won’t be clear for a couple of months when the full impact of reduced global trade, supply chain disruptions, travel restrictions and growing fuel inventories are evident.
The money supply (see graph) has grown enough in the past year to stimulate the economy – two years from now if you believe the teachings of Milton Friedman. The real economic benefits have a substantial lag. Any short term benefits of a rate cut on market sentiment are just that – short term (days, maybe weeks). A rate cut surely cannot cure the COVID-19 virus. My guess is that the FED is seeing real time data on consumption patterns (as well as other info) and it’s ugly.
Despite evidence of a possible recession, prices for various goods in the PPI have jumped concernedly year-over-year: Vegetables +21.4%, Pork +14.9%, Gasoline +23.1% and Home Heating +12% for example.
I’ve coined the phrase “inflession” to describe what it’s in store for us over the next few months or longer. The yield curve warned us months ago (when first inverted) that a recession was in the offing. The economy was bound to revert to the mean sometime but the coronavirus has triggered something more pronounced that just a slowdown. Low unemployment has more to do with demographics than GDP. Governments were (and still remain) loathe to let interest rates normalize for fear of causing political unpopularity – masking their true motives by citing worries of instability. This latest rate cut confirms that the U.S. and global economies are in trouble.