When they tell you not to freak out... but it just makes you panic more. The Federal Reserve announced its first emergency rate cut since the '08 financial crisis, slashing interest rates by half a percentage point. Bold attempt to quash investors' coronavirus-induced fears — but it actually made them panic more.
- "The Fed" is like the economy's Batman — watchful guardian, swooping in when danger strikes. Its interest-rate controlling powers have a massive effect on the economy, trickling down from financial institutions to consumers.
- When the Fed lowers rates, banks and lenders do too — that means lower interest rates for variable rate credit cards or savings accounts. It lowers the cost of borrowing while encouraging you to take money out of low-interest accounts.
- Spending and stock investing becomes more tempting, while saving and investing in gov't bonds becomes less appealing (because lower interest rates = lower returns). It's all supposed to kick-start economic activity.
- So stocks often rise after the Fed cuts rates...
Except the Fed's economic mind game backfired... Like when ramped up security at an event is supposed to make you feel safer, but actually makes you feel like there's a big threat. The move suggests to investors and consumers that things could be worse than originally thought — The Dow plunged 800 points as spooked investors sold off stocks, even though Fed rate cuts often have the opposite reassuring impact.
The Fed gave the US economy the Heimlich Maneuver... when it wasn't choking yet. During the '08 financial crisis, the Fed's aggressive cuts helped bring the economy back to life. But despite recent drops in stock prices, the market is still in an 11-year bull run — and a rate cut won't turn coronavirus-affected factories back on. The pre-emptive move also limits the Fed's wiggle room if things get really bad.