In the past week, the stock recorded the market, the worst Performance since more than eleven years: of The 123-year-old Dow Jones Industrial Average fell by 12.4 %, the technology-oriented Nasdaq Composite 10.5 % and the S&P 500 (WKN: A0AET0) lost 11.5 percent. In the past two weeks we have also experienced the largest decline (and rise) of all three major indices in a single session.
the fear of a recession in the United States increases The daily movements in the stock markets recently suggest certainly that. While it was believed that factors such as the trade war between the US and China represent the greatest short-term threat to the stock market and the U.S. economy, it looks now as if the Coronavirus 2019 (also called COVID-19 known) is the biggest threat for the growth.
If a serious threat occurs, the marches, the Federal Reserve traditionally and saves the day. Unfortunately, that will not happen this time.
How the Federal Reserve affects the US economy
The Federal Reserve is to control monetary policy in the United States responsible. It does this by short-term interest rates influenced by the Federal Funds Rate. This is the interest rate that the Deposit insurance institutions (banks and credit cooperatives) other banks and credit unions for overnight loans. Although adjustments to the Federal rate of interest shall not have a direct impact on the interest rates, influenced by the Trickle-Down effect, but all of the interest that you pay for your credit cards, to the returns that you receive on the savings accounts of a financial institution.
If the Federal Reserve wants to protect the U.S. economy from Overheating and high inflation rates, increased the Federal Funds Rate and is more expensive, and thus borrowing for businesses and individuals. If the Fed wants to on the other hand, stimulate the growth, lowers the Federal Funds Rate to encourage borrowing and lending. Between December 2008 and December 2015, the Fed Funds Rate has been kept at an all-time low, which is an important reason for this is that the US economy from the financial crisis so well has recovered.
it sounds so simple, but the management of the monetary policy strategy of the country is incredibly difficult. This is because the economic data that the Fed prefers for its monetary policy decisions, can be weeks to months old. In addition, it can take between three months and two years, until the Changes in the Prime rate, the US Central Bank’s acts on the US economy. It is so easy to overdo it due to a fast tightening or loosening of monetary policy.
If the Coronavirus leads to a US recession, not the Fed be able to save us
Since the Coronavirus is able to shake the US economy and the world economy, unexpectedly have acted with the Fed and Board of governors last Tuesday, the fast and the benchmark interest rate by 50 basis points to a new range of 1.00 to 1.25 % reduced. It was the first Time since the financial crisis in 2008, the Fed for a rate cut between meetings of the Federal open market decided by Committee. The hope is that lending and consumption picks up again, which will lead to a revival of the US economy in the course of this year. In addition, this strengthens the impression that the Central Bank will do everything Necessary to get the longest economic Expansion in U.S. history.
But there are two core problems in this Thesis,
first, exogenous shocks to the economy can not be managed with fiscal or monetary means. If COVID-19, for example, leads to a recession, this is caused by lack of consumption. Reminder: The consumption of power in the United States, about 70 % of the gross domestic product. If the fear of the consumer and the company is pushing to buy less, can the Fed not lowering the rate of interest of the world that these habits are changing. Lower credit interest rates can encourage businesses to production, but if the consumer does not buy.
The other Problem is that the Federal Reserve Bank has all the cards in the Hand. By this I mean that the US Central Bank had to lower the key interest rate by an average of 500 basis points, to stimulate the US economy so that you come out of a recession. Even at the height of the recent economic cycle, the key rate has been exceeded, however, never a margin of 2.25% to 2.5%. We are currently not even in a recession, but the Fed has 100 basis points in “fire power” in the Tank, before the interest rate would be back up to a historic record low. If – and this is a big If – the Coronavirus leads the United States in a recession, the US Central Bank, in order to relieve the US economy or the stock market. to stay
Investing is the best approach
The prospect of a recession may sound scary, or maybe even new to some, has not yet experienced a recession, but such downturns are a natural part of the economic cycle.
In addition, recessions are usually relatively short, since the US economy and the stock market need a much longer period of time for expansions than for contractions. Even though it may be tempting to the supposed safety of other forms of investment to access, so this is a very volatile stock market almost always a bad idea.
You see: It is not just that many of the biggest one-day gains of the equities market in the vicinity of the worst days, but the stock market has also has every single one of the 37 previous corrections of the S&P 500 by at least 10 % (not rounded) exceeded. If you buy high-quality companies and give you just enough time grants to increase their sales and profits, you tend to create long-term prosperity.
We would consider the Federal Reserve as our Savior, but in reality we are our own financial knight in shining armor, as long as we hold on to our investments for the long term – and only for as long as we hold on to our investments for the long term.
The post The Fed can’t save us from a Coronavirus-recession appeared first on The Motley Fool Germany.
This article was written by Sean Williams English and the 05.03.2020 on Fool.com published. It has been translated for our German readers can participate in the discussion.
The Motley Fool does not own any of the above-mentioned shares.
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