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The U.S. Federal Reserve announced an “emergency” 50 basis point cut to its benchmark interest rate. The cut left the Fed benchmark with a range of 1% to 1.25%. The move comes ahead of the Fed’s regular meeting on March 18.

The interest rate cut, which usually produces a stock rally (and remember the prospects of a cut produced a good rally yesterday), led to a substantial sell off in U.S. markets with the Standard & Poor’s 500 falling 2.81% at the close today, Tuesday March 3. The Dow Jones Industrial Average dropped 2.94%. The NASDAQ Composite was lower by 2.99% and the Russell 2000 small cap index lost 2.14%. The iShares MSCI Emerging Markets ETF (EEM) was down just 0.14%.

Why the drop?

In my opinion because the Fed has managed to create a destructive negative feedback loop with this cut.

First, the “emergency” nature of this move raised worry in this market. The Fed hasn’t cut rates in-between meetings since the financial crisis in 2008. That’s not a memory that produces confidence in the financial markets. One reaction that I’ve heard a lot today is “What does the Fed know that we don’t? Why are they so worried that they need an “emergency” cut in interest rates?” Just a few weeks ago, you’ll remember, the Wall Street consensus was that the economic damage from the coronavirus was just a one quarter (or at its worst two quarter) problem. Does the Fed now see a recession coming?

Second, that first thought leads to disappointment at the Fed’s action. If a recession is a real danger (see those worries about why an emergency cut), then the Fed’s move is too little. Only 50 basis points? Why not a new program of quantitative easing? Why something like former European Central Bank President Marie Draghi’s memorable promise during the global financial crisis to do “whatever it takes”?

Three, the second thought leads to a belief/hope that the Fed will cut interest rates again at the regular March 18 meeting and then again at the June meeting. The consensus in the Fed Funds futures market has moved to a belief in another 50 basis points of cuts, at least, at those two meetings.

And, four, that sets the Fed up to disappoint (if there is no interest rate cut on March 18) or to create another spiral of worry (doesn’t another cut mean that the Fed is really worried about a recession?)

I don’t see how the Fed wins in this situation–especially since interest rate cuts will do nothing about the economic problems created by the coronavirus pandemic.