The debate on whether the Federal Reserve must hold an emergency meeting this weekend and cut interest rates to arrest the coronavirus stock market crash is one of the hottest debates on Wall Street right now.
Traders and strategists are mixed on whether the Fed needs to go that route, however.
For one, nobody knows the true impact yet of the coronavirus on the U.S. economy — it’s purely speculation. Two, an emergency rate cut could send a negative signal to the market in that the Fed is worried about a sharp slowdown in growth soon and perhaps, a mild recession by mid-year.
And finally there is the view a rate does nothing to jumpstart businesses that can’t get supplies from China because its factories are at a standstill. A rate cut won’t cure the coronavirus outbreak itself. So, why bother with a 25 basis point rate that would unlikely solve anything that current ills equities?
“The Fed needs to call an emergency meeting this weekend and cut rates by 50 basis points and imply another 25 basis point cut on March 18,” former New York Stock Exchange floor trader Stephen Guilfoyle, founder and President of Sarge986 LLC, said on Yahoo Finance’s The First Trade. “We have to be courageously aggressive here. They have to keep buying T-bills and providing short-term liquidity.”
Veteran trader and founder of The Sevens Report Tom Essaye doesn’t agree.
“I don’t know what it would do practically,” Essaye said. “There may be some supply chain disruption, but I don’t know what cutting rates 50 basis points would do — they aren’t going to make the stuff come from China any faster.”
Meanwhile, the Fed continues to stand firm on there being no need to slash rates to respond to the market selloff (something a jittery market hates hearing).
Long-time policy dove James Bullard, president of the Federal Reserve Bank of St. Louis, said ahead of a speech Friday the coronavirus would have to reach pandemic status for a rate cut. Until then, the Fed should continue to monitor the situation Bullard suggested, echoing recent comments by other Fed members and Fed chief Jerome Powell.
Markets responded in kind.
The Dow Jones Industrial Average spiraled more than 1,000 points in early trading Friday. Big-cap stocks such as Microsoft, Apple, Best Buy, Walmart and even a safe-haven play in Coca-Cola continued to be dumped aggressively.
It’s true risk-off on the Street with no ultimate Buy signal apparent yet. Stay strong.
Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Watch The First Trade each day here at 9:00 a.m. ET or on Verizon FIOS channel 604. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.