With the Federal Open Market Committee (FOMC) moving last week to cut its target federal funds rate by 50 basis points, all eyes are on next week’s FOMC meeting to see what the Fed does next. The expectations are for the Fed to continue cutting interest rates, as other central banks such as the Australian and Canadian central banks have done the same. We’re seeing the increased likelihood of another round of interest rate cuts and eventually quantitative easing just like in 2008 and afterwards. And the possibility of negative interest rates being introduced can’t be ruled out.
Right now expectations are for the Fed to cut rates another 25 basis points next week, to a range of 0.75-1.00%. Next week’s FOMC meeting will also feature a press conference by Fed Chairman Jay Powell, which might be perhaps the most anticipated press conference in years. Since markets are also expecting another 25 basis point cut at the April FOMC meeting, expect that to be a hot topic.
If the Fed were for some reason not to cut rates next week, it would come as a shock to markets, and would undoubtedly lead to a major stock market selloff. Of course, even an expected rate cut wouldn’t boost markets either, because markets have already largely priced that in.
Activity in markets going forward from here will largely be determined by central bank actions, both from the Federal Reserve and from other central banks. We’re already seeing Chinese stock markets shooting up in response to all the liquidity the Chinese government pumped into the system in response to the coronavirus shutdown. That has some hoping for similar results in the US, but that’s unlikely.
The US stock market bubble has just about run its course, and the pattern we’re set to follow is that of 2007-2009. Remember that the Fed made a handful of emergency rate cuts back then too, to no avail. It wasn’t enough to keep stock markets from plummeting throughout 2008 and into 2009. And it took trillions of dollars worth of quantitative easing for the Fed to get markets just back to where they were in 2007.
The Fed has boxed itself in now, between its “not QE” quantitative easing that it began last fall, and now its emergency rate cut. With only 100 basis points worth of cuts practically on the table, and half of those likely in play over the next two months, when things get really bad the Fed is going to have to get creative, and that may mean introducing negative interest rates.
The inability of negative interest rates to stimulate the European and Japanese economies is well known, but the Fed will undoubtedly feel pressure to act and “do something.” Once negative rates are introduced, it will be incredibly difficult to raise them, and the effects could be catastrophic for the long-term health of the financial system.
In short, we’re witnessing the first stages of what looks to be a very difficult time for the financial system. It could even make 2008 look easy by comparison. Investors who haven’t begun to invest in gold or otherwise protect their assets stand to lose a great deal if they don’t heed the warning signs that are all around them.