Monday, March 2, 2020

Goldman Sachs Expects Aggressive Interest Rate Cuts From the Federal Reserve

In the face of the Wuhan coronavirus crisis, the Fed likely will announce a 50 basis point cut in the Fed funds interest rate at its March meeting, if not sooner, says Goldman Sachs.

In all, the well-connected investment bank sees the Fed cutting 100 basis points this year, which is an increase from just Friday, when it saw a cut of 75 basis points. The current Federal Reserve target rate for Fed funds is 1.50% to 1.75%. Thus, Goldman is seeing an eventual Fed target Fed funds interest rate range this year lowered to 0.50% to 0.75%.

Goldman expects the first cut to be a near-global coordinated rate cut.

“Chair Powell’s statement on Friday suggests to us that global central bankers are intensely focused on the downside risks from the virus. We suspect that they view the impact of a coordinated move on confidence as greater than the sum of the impacts of each individual move,”  Jan Hatzius, Goldman’s chief economist, said in a note.

Since Federal Reserve interest rate manipulations never make sense, it is difficult to understand what further interest rate cuts will do other than increase the Fed's distortion of the capital/consumption ratio structure of the economy and put more money into the system. The additional money printed will put additional upward pressure on prices.

This is why I am warning in the EPJ Daily Alert that the most significant medium and long term economic impact of the coronavirus will be additional upward price pressures from the added money and a slowdown in product and services produced during the panic virus period. It will, thus, be upward pressure on prices as the economy faces a slowdown in productivity, a kind of reverse or anti-productivity environment, followed by eventual Fed-created dollars upward pressure on prices.


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