Why US stocks fell instead of rising after US Fed rate cut; here’s how human psyche played out

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Updated: Mar 04, 2020 2:15 PM

The United States Federal Reserve Chairman Jerome Powell announced an emergency rate cut by half a percentage point on Tuesday morning and the markets rallied for just 15 minutes and then the move backfired.

Investors took note that even the most influential central bank in the whole world is taking measures to tackle the impact of Coronavirus.

The United States Federal Reserve Chairman Jerome Powell announced an emergency rate cut by half a percentage point on Tuesday morning and the markets rallied. Dow Jones Industrial Average gained 456 points, while the S&P 500 jumped 73 points in a matter of 15 minutes. Microsoft share price gained 2 per cent; Apple jumped 2.8 per cent; Amazon was up by 2.1 per cent and Facebook moved up 2.3 per cent. It was all merry for 15 minutes on Wall Street, but then investors realised what the first emergency rate cut since the Lehman Brothers collapse in 2008 meant. After that, the Fed rate cut backfired as stocks fell. Investors took note that even the most influential central bank in the whole world is taking measures to tackle the impact of Coronavirus. Who should be blamed for the fall? It’s the human psyche.

Chris Rupkey, Chief Financial Economist for MUFG Union Bank told Bloomberg that the rate cut makes it look like Fed officials are panicking as much as stock investors. “They did not need to be so aggressive and the Fed under Powell keeps responding wrongly in our view more to the financial markets than they are to the broader economy. We aren’t in a recession yet and today’s move won’t keep one from coming,” he said.

Similar views were expressed by Peter Schiff, CEO of Euro Pacific Capital, who took to Twitter to claim that the rate cut will make the situation worse. He said, “As the stock market was selling off, threatening to erase yesterday’s Fed inspired record point gain, the Fed came to the rescue with an intra-meeting emergency 50 basis point rate cut. Not only will this cut not cure the Coronavirus, but it will make the U.S. economy sicker.”

The last time Fed announced an emergency rate cut was in October of 2008 when Lehman Brothers collapsed and markets melted along with that. A sudden rate cut by the Fed on Monday brought flashbacks of the turmoil of 2008 and investors hunted for safer havens to park their money as bond yields plummeted. 

“I’m now nervous. I’m more nervous than I was before,” said Jim Cramer, host of CNBC’s Mad Money show. Jim Cramer said that the rate cut by Fed does not ease Coronavirus fears and unless the Fed can create a vaccine or beat the virus, the move will not help. “It’s great that the Federal Reserve recognizes that there’s going to be weakness, but it makes me feel, wow, the weakness must be much more than I thought,” Cramer was quoted saying by MarketWatch.

Prior to that Fed had cut rates in a similar manner in 2001 when tech stock bubble burst, opening of markets post 9/11 and when the subprime mortgage crisis widened. The rate cut on Tuesday comes more than a decade after the last such emergency move by the US Fed.

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