The Coronavirus and the Federal Reserve; What Happens After South Carolina?
Author: Greg Valliere
February 27, 2020
PRESIDENT TRUMP’S PRESS CONFERENCE last night showed why he’s the favorite to win re-election: he’s a stunning performer — funny, nasty, disingenuous and upbeat all at once. And he’s really good at deflecting blame (Mike Pence will make a very convenient scapegoat, if necessary).
THE ULTIMATE SCAPEGOAT FOR TRUMP, as usual, is the Federal Reserve, which Trump blamed last night — along with the media and the farcical Democrats’ debate in South Carolina — for spooking the financial markets.
THE MARKETS DON’T SPOOK EASILY but there’s a legitimate concern that supply chains with China will dry up, there’s concern about a recession (or worse) in much of the world, and there’s concern about plunging corporate profits. Trump criticism aside, this puts great pressure on the Fed.
IF MARKETS DON’T STABILIZE SOON, we think central banks around the world will be forced to stimulate. Will still lower rates make a huge difference? Maybe not, but a Federal Reserve move could halt the slide in equities, while sending a signal that more stimulus could be forthcoming if the virus spreads.
THE FED ALREADY WAS IN AN ACCOMMODATIVE MOOD: In a little noticed speech last week, Gov. Lael Brainard proposed a novel approach to inflation targeting. If inflation fails to meet its target by, say, 1/4 percentage point, the Fed should then exceed that target by 1/4 percentage point, she said.
IRONICALLY, THE FED AND TRUMP ARE ON THE SAME PAGE: They all agree that inflation is too low, and now they face a crippling global crisis that could drive inflation even lower. Fearless forecast: the Fed will cut rates by early spring and probably will cut again in early summer — setting the stage for an economic snap-back in the second half.
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WHAT HAPPENS AFTER SOUTH CAROLINA? We think Joe Biden will win the South Carolina primary on Saturday, maybe not comfortably, but a win is a win. Then comes the really heavy lifting: next week’s Super Tuesday primaries, which are shaping up as a modest success for Biden — or, more likely, a crippling blow.
BIDEN SUPPORTERS MUST BE HORRIFIED by an article in this morning’s New York Times, which describes an ill-funded, inept campaign operation for him in key Super Tuesday states. Biden is nearly out of money, facing a blowout in California on Tuesday and a close finish — at best — in Texas, North Carolina and Virginia.
BIDEN LOYALISTS SAY HE WILL WIN enough delegates on Tuesday to stay in the race, and they insist he will do well with African-Americans and blue collar workers in upcoming primaries in Ohio and Michigan. Maybe. But his window is closing fast; perhaps only an enthusiastic endorsement from Barack Obama, blasting Bernie Sanders, could make a difference.
AS FOR THE RIDICULOUS THEORY that the stock market fears Bernie Sanders, just talk with moderate Congressional Democrats who privately blast him as a grouchy old Marxist with tons of baggage. If he’s the nominee, the Senate should easily stay Republican and the liberal House could flip back to the GOP. The stock market should be thrilled if Bernie wins the nomination.
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