Dow Jones Crashes: Are Fed Rate Cuts Really Helping?

  • Looking at the futures, the Dow Jones Index seems set for another crash today. On Sunday, the US Federal Reserve slashed interest rates by 100 basis points. Notably, this is the second emergency cut announced by the US central bank this month.
  • However, US stock markets crashed on March 3 despite the Fed cutting rates by 50 basis points. With the recent cut, the Fed has brought down US interest rates to zero.

Dow Jones crashes

The Dow Jones Index’s volatile journey might continue this week as well. Futures are pointing to another 1,000-point drop for the Dow Jones today. US stock markets were on a rollercoaster ride last week. Trading halted on two days due to circuit breaker rules. However, markets recouped some of their losses on March 13. The Dow Jones Index (NYSEARCA:DIA) and the S&P 500 each gained more than 9.0%. However, the optimism was short-lived. If futures are any indication, the Dow Jones Index looks set for another crash today.

US stock markets

Globally, governments and central banks are aware of the coronavirus’ financial repercussions. There has been a flurry of fiscal and monetary loosening across the globe. On March 13, PresidentTrump declared a national emergency. The Fed also slashed interest rates twice this month. On Sunday, Fed Chair Jerome Powell lowered rates by 100 basis points. US interest rates have now fallen back to zero. Rates stayed at zero between 2008 and 2015. In December 2015, the Fed started raising rates and continued to do so until 2018. However, last year, the Fed embarked on rate cuts and gradually lowered rates by 75 basis points. The Fed’s loosening helped US stock markets last year. The Dow Jones Index and the S&P 500 (NYSEARCA:SPY) scaled new highs.

Dow Jones crash and Fed rate cuts—linking the dots

US stock markets crashed on March 3 despite the Fed cutting rates by 50 basis points. Likewise, Dow Jones futures crashed on Sunday despite the Fed announcing a 100-basis point rate cut. However, President Trump, who has been pushing the Fed to lower rates, praised the Fed. Will the Fed’s rate cut help fight coronavirus uncertainty?

In my view, fiscal measures might help address the coronavirus fallout better compared to monetary measures. However, will lower interest rates help consumers and businesses hit by coronavirus? Lower interest rates will lead to lower mortgage payments for consumers and reduce outgoing interest for corporates. However, monetary measures might help address a health emergency like the coronavirus. In contrast, the 2008 stock market crash was due to a financial crisis. I think that fiscal measures like direct money transfer to individuals, especially daily wage earners, would be a better way to address the economic impact due to the coronavirus.

Wild swings for US stock markets

For stock markets, the 1,000-point swings look like the new normal for the Dow Jones Index. There have been more than 1,000 point swings this month compared to the last decade. Read Dow Jones and S&P 500: Will Wild Swings Continue? to learn more.