Vanguard: Fed rate cut a 'high-risk bet'

The Federal Reserve’s effort to address the economic risks associated with the spread of the novel coronavirus with an emergency interest rate cut is being criticized for potentially making matters worse.

Roger Aliaga-Diaz, chief economist at The Vanguard Group, described the Fed’s 50-basis point cut as, “premature given the lack of data suggesting a significant drag on the economy.”

“The high uncertainty around the potential implications of the coronavirus warrant further assessment before taking action of such magnitude,” Mr. Aliaga-Diaz added. “Based on the economic and virus-related data available today, we feel this is a high-risk bet. The Fed may find themselves in a difficult position should conditions deteriorate further, finding themselves required to act forcefully in the weeks ahead."

The Tuesday morning announcement by Fed Chairman Jerome Powell, representing the first emergency rate cut since the 2008 financial crisis, was described as a means of protecting the economy against the negative impacts of the fast-spreading coronavirus.

“The spread of the coronavirus has brought new challenges and risks,” Mr. Powell said at a press conference following the rate-cut announcement.

The S&P 500 responded negatively to the news, spending most of the trading day down about 2%, which came on the heels of a 5% gain on Monday.

“The nature of today’s announcement could send the wrong signal to market participants, including individual investors who are concerned with recent market volatility,” Mr. Aliaga-Diaz said. "This also creates uncertainty around the Fed’s framework for monetary policy decisions following market dislocations.”

Paul Schatz, president of Heritage Capital, responded to the sudden Fed move with similar surprise.

“I don’t know what Powell and his minions were thinking,” he said. “The time for the cut was Sunday night (following the market’s worst week in a decade). Cutting after the Dow soars 1,300 points and during the trading day makes them even more foolish than they already are. Personally, I would have either cut Sunday night or waited for another decline.”