Last week, Federal Reserve Chairman Jerome Powell announced that the Fed would be open to lowering interest rates in order to counteract the adverse economic effects of the Covid-19 outbreak and the fear it has caused. It did not take him long to make good on his word, as the Fed cut their benchmark interest rate by 50 basis points on the following Monday.

Largely due to where I was educated, I have a very positive view of the Fed. I have written pro-Fed pieces in the past where I praised their objective decision-making and bold financial engineering. However, this action from the Fed I can’t defend. It is a reaction driven by the fear of the masses rather than the sound reasoning of disciplined technocrats. Further, the Fed has undermined its own ability to respond to a real economic crisis in the future and has shown Donald Trump and investors that it is willing to intervene in the event of a relatively minor market downturn.

What are Interest Rates for?

Whether or not you agree with this argument largely depends on what you believe is the primary aim of lower interest rates. At its core, the purpose is to stimulate business borrowing and investment. In 2008, the Fed used this tool to encourage businesses to resume normal operations in the midst of an economic implosion that froze the US economy. Businesses borrowed more, made new investments, and lent their funds out at lower rates to consumers who did the same.

Covid-19 is not the same. Thus far, we haven’t seen too many tangible economic effects of the virus, especially not in the United States. As of now, S&P Global estimates only one or two tenths of a percentage point shaved off of the United States’ GDP growth rate for this year, a relatively minor economic ripple.

Additionally, if the purpose of a rate cut is to spur business investment, analysts must ask themselves: will a .50% rate cut really encourage businesses to build new factories, open new offices, and establish global supply chains abroad in the face of the grand uncertainty that Covid-19 brings with it? For reference, between 2006 and 2008 the Fed had to cut rates from a peak of 5.25% to effectively 0%. Even this cut, at 10 times the magnitude of the cut for Covid-19, could not fully weather the storm of the Great Recession.

The Stock Market got its fix

So, no, perhaps the Fed cannot encourage corporate executives to open new factories and offices – but they can provide stock investors with a shot of morphine to dull the pain of a gloomier world economic outlook. However, this only reinforces to investors that the Fed will step in to keep asset prices inflated. In the midst of the longest bull market in history, investors seem to have forgotten that the market doesn’t only move in the up direction and has shown reliance on the Fed to intervene when markets fall 5%+. In 2019, when the Fed considered leaving rates the same when the market expected a cut, popular investing website MarketWatch released an article with the headline “The Fed may break a lot of stock-market investors’ hearts this week,” as if the Fed is in wedlock with the market and must continue to appease it.

Political Pressure from the White House

This dangerous idea is reinforced by pressure from Donald Trump, who has claimed new stock market highs as his own personal victory and wishes to protect this “achievement,” no matter the cost to the Fed or its independence. He should not be given any signs that the Fed will cave to his demands.

Overreactions to a Real Threat

None of this is to say that Covid-19 isn’t gravely serious or that everything will be okay. The potential magnitude of a global Covid-19 pandemic would absolutely warrant both extreme action on behalf of the government, and a stock market drop of more than 10%. But it is to say that as of now, nobody really knows. And as legendary investor Howard Marks said in 2016, “In the real world, things generally fluctuate between ‘pretty good’ and ‘not so hot.’ But in the world of investing, perception often swings between ‘flawless’ and ‘hopeless.’” Maybe, just as of right now, some of us are overreacting.

The Fed is a great American institution and will hopefully return to its former glory post-Trump. However, Powell and the Fed must be conscious of their own competencies and should not make high modernist promises of being able to economically weather Covid-19 (interestingly, Powell alluded that the Fed would be unable to do this, but yet they cut rates anyway!). Only fighting back against new infections and tangible global containment of the virus will be able to do that, and the Fed just preemptively gave up 50 of its chips that it could have used to stymie a real economic crisis, if and when it truly arrives.