Richard Clarida Says Fed Isn't Planning to Cut Interest Rates Anytime Soon

Matty-Sways

Richard Clarida, the vice chair of the Federal Reserve, made a series of perplexing statements on Tuesday.

First, he said that “the economic disruptions from China could spill over to the rest of the global economy.” Then stated the Fed isn't planning to cut interest rates anytime soon regardless of the threat the coronavirus poses to world growth.

The question is why? 

Does the Fed might believe that the U.S. has safely contained the coronavirus, an argument made Tuesday by Larry Kudlow, director of the National Economic Council.   

Does the Fed think that the coronavirus is a temporary supply shock, like when oil prices rise during Middle East turmoil.

Does the Fed believe the effect the coronavirus will have on the supply chain will lead to inflation and easing interest rates would only add to those inflationary pressures.

Or does the Fed simply not want to lower interest rates in fear of losing their go to tool when economic times are tough.

The Fed’s dislike of low short-term interest rates has created the lowest long-term interest-rate environment in modern U.S. history. Their actions have pushed up the demand for long-term bonds and pushed down long-term yields to record or near-record lows. 

The truth is nobody knows the extent of the coronavirus on our economy. It is largely based on its spread and the fear created from it. As the markets plummet (could be a well needed correction) and news of whistle blowers coming forward regarding the handling of US citizens the US and its officials are just trying to stop the bleeding.

If the coronavirus does spread and further effects the supply chain of crucially needed parts as well as global aggregate demand. The Fed will need to cut rates in response to that risk. Failing to do so will further deplete its institutional credibility.

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