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Next Fed Meeting Won't Solve Global Economic Crisis, But Here's What Consumers Can Do

| MoneyRates.com Senior Financial Analyst, CFA
min read

money-inflated-dollar-billEven with everything else that's going on, expect the spotlight to be on next week's Federal Reserve meeting.

Don't expect the Fed to have any dramatic solutions to offer in the face of what has just been declared a global pandemic, though.

Obviously, the Fed can't do anything about the health aspects of the coronavirus. But the fact that the outbreak is acting as a serious drag on global economic activity has become increasingly clear - enough to pressure the Fed to take additional steps to help the U.S. economy.

The problem is, the Fed has few tools at its disposal that address this situation. That's partly because of the nature of this outbreak and partly because its previous policy decisions have painted the Fed into a corner.

What does this mean?

For consumers, it means you shouldn't expect a quick and easy solution from the government. In fact, the best actions available may be ones you can take yourself.

What's Next for The Fed - Negative Interest Rates?

On March 3, the Federal Open Market Committee (FOMC) announced an emergency interest-rate cut of half a percent.

This was a dramatic move for these reasons:

  • It was twice the size of the quarter-percent interest-rate adjustments the Fed has been making in recent years.
  • The Fed acted without waiting for the regular FOMC meeting scheduled for March 17-18.

Still, as dramatic as the move may have been, whether it will be effective remains to be seen.

On both a nominal and inflation-adjusted basis, rates were already well below historical norms even before the Fed's most recent rate cuts. So even though it's not uncommon for the Fed to respond to economic weakness by lowering the federal funds rate, there may be limits on that approach this time around.

Little room to maneuver

Having kept rates so low limits the use of rate cuts to goose the economy in two ways:

  1. Since businesses and consumers are already very used to low rates, further cuts have less impact.
  2. As a practical matter, with rates already in the low single digits, there's hardly any room to cut them further.

In 2007, as the economy headed into the Great Recession, the federal funds rate was 5.25%. That left the FOMC room to cut that rate by a total of 5% from late 2007 through the end of 2008.

Today, with rates already down to a range between 1.00% and 1.25%, there's nowhere near as much room for a rate cut.

In some quarters, the possibility of negative interest rates has been discussed - and it's even been tried by some central banks - but it's largely a new and untested concept.

And it's a concept that could backfire.

Far from encouraging borrowing, negative rates could discourage lenders so much that access to credit dries up.

Solving a Problem that Doesn't Exist?

The Fed's economic tools are monetary policy, involving the supply of liquidity and the cost of borrowing. Congress and the White House control fiscal policy tools which include things like tax cuts and spending.

Unfortunately, the traditional monetary and fiscal moves to stimulate the economy may not work in the current situation.

For one thing, with consumer debt at record highs, it's clear that willingness to borrow has not been a problem. So lowering interest rates even further amounts to solving a problem that doesn't exist.

In any case, whether fiscal or monetary, actions to put more money in the hands of consumers won't necessarily help. After all, economic activity is being restricted because people are afraid to leave the house, not because they are short on cash.

Finally, cutting interest rates and fiscal stimulus are moves to address a slow economy. They do nothing to fight rising inflation, and in fact they might make it worse. This is a problem because in this crisis, the same thing that is slowing the economy may also revive inflation.

Shortages cause inflation. When there are fewer supplies to go around, some people will pay more for them.

If you've tried to buy hand sanitizer lately, you know how the coronavirus outbreak has already caused some shortages. Now think more broadly about all the different goods and services that may become scarcer if huge numbers of people around the world are unable to go to work.

Next week's Fed meeting may yield some creative new response to address the dual challenge of a slowing economy with rising inflation. Perhaps the best that can be hoped for is some guidance on how the Fed expects this situation to play out.

Consumers: Steps You Can Take for Yourselves

For all the attention that will be paid to the Federal Reserve and U.S. government spending policies, the most sure answers for consumers might be things they can do themselves.

After all, it looks as though neither monetary nor fiscal policy offers a clear solution to the current crisis. This could point to an extended period of slower economic growth, or possibly a recession.

Given this outlook, there are four things consumers should consider:

1. Rein in spending now

Not only could the economy in general be in for an extended slump; but as quarantines restrict more businesses, individual workers may face periods of lost or reduced income.

Don't wait till you've burned through savings and maxed out your credit cards before you cut back on spending. Just as you may be stocking up on supplies to help you wait out the crisis, think about how to conserve your financial resources to do the same.

2. Don't panic out of the stock market

No one likes to see their retirement investments take a hit of several percent in one day; but if it made sense for you to be in stocks a month ago, it still makes sense today.

Look at it this way: Treasury bonds and liquid assets are yielding less than the rate of inflation. Stocks at least give you a fighting chance of not losing purchasing power in the long run. Before you panic out of the market, think about what you'd be getting into.

3. Revisit your retirement assumptions

Speaking of low interest rates, these may require you to revisit your retirement assumptions. Retirement investments usually include some bonds, and the assumptions people make about what their investments will earn are generally based on history.

However, while ten-year Treasury bonds have averaged a 6.3% yield over the past 50 years, today they are yielding less than 1%. The likelihood of lower returns means you should use a retirement calculator to help you adjust your retirement planning assumptions accordingly.

4. Raise your interest rate by shopping around

Even in a time of drastically falling interest rates, most consumers have an opportunity to raise their rates. That's because there is such a big gap between the leading savings account rates and the national average.

The same goes for money market accounts and CDs. So, if you are looking for a safe, positive move to make in this environment, shopping for a higher savings account rate might be the surest thing going.

>> Compare current savings account rates

From both a health and an economic standpoint, the coronavirus is a serious challenge. However, within fairly recent memory, Americans have had to deal with other crises including the dot-com collapse, 9/11 and the Great Recession.

What history shows is that the best financial approach to a crisis is to think beyond that event to what happens after it's over. That perspective should help guide you away from panic and toward financial decisions that make sense for the long run.


Previous Federal Reserve Board Updates articles:

FOMC Date2020 FOMC Meeting Update Articles
01/22/2020January 2020 Fed Meeting - More Than Meets the Eye?

 

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