The Federal Reserve was likely trying to boost confidence in the U.S. economy with its emergency rate cut of 50 basis points on Tuesday, but Moody’s Analytics Chief Economist Mark Zandi contends the impromptu action had the opposite of its intended effect.
“Cutting rates was the right policy choice, certainly the right thing to do, but doing it the way they did was a mistake,” Zandi told Yahoo Finance’s “The Ticker” on Tuesday, several hours after the Fed made its first decision on rates outside of a scheduled meeting since October 2008.
“Certainly we know that in hindsight,” Zandi added, “because it didn’t do what it was supposed to do and that was instill confidence. It in fact undermined confidence.”
The Federal Open Market Committee released the unanimous decision at 10 a.m. on Tuesday, with Fed Chair Jerome Powell citing “evolving risks” due to the coronavirus, or COVID-19. While stocks initially jumped on the news, a sharp selloff ensued with the Dow dropping more than 800 points by market close. In his interview with Yahoo Finance, Zandi attributed the selloff to the Fed’s unusual timing.
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“I think the market is spooked by the Fed’s action. They expected the Fed to cut interest rates, but they didn’t expect the Fed to cut rates like they did,” Zandi said. “That just made people very nervous.”
The Moody’s economist is not the first to question the Fed’s move to cut its target range to between 1% and 1.25% outside of a regularly scheduled meeting. Chris Rupkey, chief financial economist at MUFG Union Bank, said the surprise move looked “rushed” and “not properly considered.”
“Moving between meetings with a bigger than normal interest rate cut looks like Fed officials are panicking as much as stock market investors did last week,” he wrote in a note to 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.”
Still, Satyam Panday, senior U.S economist, S&P Global Ratings, praised the Fed’s timing, although he did so in a note that may have been written before the selloff.
“While a Fed interest rate cut will not solve the devastating human effects and related fear that the coronavirus has created, from an economic perspective, even though it will not stave off headwinds to spending growth in the near term, it does help cushion the blow,” Panday wrote. “Still, though we were anticipating a move at some point, we do think the Fed did well by acting decisively and moving sooner.”
For his part, Zandi reiterated that the rate cut will help the U.S. economy, in part by boosting the housing market and aiding businesses that need to finance their operations in the short-term.
“It should help and it will help, and it was the right thing to do,” Zandi said. “But obviously the execution here didn’t work out so well.”
Erin Fuchs is deputy managing editor at Yahoo Finance.