eResearch | Many pundits believe the Fed needs to cut interest rates to mitigate the negative effects of the COVID-19 situation, which is approaching panic levels as far as the stock market is concerned. However, this panic has caused a considerable market correction that has extended to almost all risky asset classes but, at the same time, has resulted in a surge in the price of safe assets.
The upshot is that there has been an increase in the demand for cash, for money. The appropriate policy for the Fed is to offset this increased demand for money by reducing the attractiveness of money. Of course, that means lowering short-term interest rates.
Calafia Beach Pundit Anticipates An Imminent Rate Cut
The Calafia Beach Pundit believes the Fed should cut interest rates by 50 bps and that this cut should happen immediately.
The chart below is a good way to judge whether the Fed is keeping short-term rates too high. The 5-year TIPS red line represents the market’s expectation for what the real Fed funds rate (the blue line) will average over the next 5 years. The red line has recently fallen below the blue line by about 50 bps. Thus, the market now thinks the Fed should cut rates by 50 bps within the next few months. Given the panic associated with COVID-19, the sooner the cut the better.
Scott Grannis concludes that, “The Fed can’t provide a cure for the Covid-19 virus, but it can mitigate its adverse effects by easing monetary conditions in response to the market’s increased desire for money and money equivalents.”
Latest Report
There are additional charts that Scott Grannis includes in his latest article to support his opinion. You can read the entire Calafia Beach Pundit report with its accompanying 4 charts by clicking: Rate Cut?
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