This time is different: Rate Cut not effective
This time is different. Rate cut is not effective! On 2020-03-03, despite a emergency rate cut of 50bps by the Fed, Dow Jones still plunged 2.9%, S&P 500 2.8% and Nasdaq Composite 3%.
Why? Because Convid-19 effectively caused a “supply shock” – a disruption to the supply chain as a result of factory shutdowns and curtails of transportation and travel. Monetary and fiscal stimulus is typically aimed at mitigating demand shocks, i.e. when there is a sharp cutbacks in spending by households, businesses or governments.
Nonetheless, what Fed’s move is to provide insurance against the possibility of a spill over of supply shock into a demand shock.
Now, with the 10-year Treasury yield below 1%, yield-hungry investors will be even more hungry for bond proxies such as Utilities, Consumer Staples and Real Estate, classic high-yield sectors, to generate needed income, regardless of their valuations or their business prospects.
Reference:
- MarketWatch, 2020-03-03, “Why stocks tanked despite the Fed’s emergency rate cut”
- CNBC, 2020-03-03, “10-Year Treasury Yield falls below 1% for the first time after Fed slashes rates due to coronavirus”
