Duy Vu

Professor Tristan Potter

ECON 202

March 11, 2020

SHORT PAPER: ECONOMIC ARTICLE ANALYSIS

I choose the article “Fed makes Emergency Rate Cut, but Markets Continue Tumbling”,

written by Jenna Smialek and Jim Tankersley, published March 3, 2020 and updated March 6,

2020. This article discusses the emergency cut of interest rates from Fed due to the outbreak of

coronavirus in March 2020. This rate cut is the highest since the depths of 2008 financial crisis.

The effect can be seen here is the stocks rallied for about fifteen minutes, but then people

kept worried about the coronavirus. As a result, the economic risks from the coronavirus made

people sold more and more, therefore fueled the market sell-off that day. Another consequence is

that despite the rate cut, the S&P 500 fell about 2.8%, and the yield on 10-year Treasury notes

dipped down 1 percent.

From the lessons that we have learnt in chapter 13, if Fed wants to decrease the interest

rates, it has to implement the expansionary monetary policy. They will make the open-market

purchase of Treasury bills or bonds in order to reduce the supply of Treasury bills and bonds, but

on the other hand, the bank reserves will increase, thus increasing the money supply. Due to the

graph of “The Market for Bank Reserves”, if the quantity of bank reserves increases by putting

more money supply, the interest rate will go down. By decreasing the interest rate, Fed hopes

that the market will be better, people will invest more in the markets and stop the negative

impact of the coronavirus. But unfortunately, the market still continues to go down, “By late
Tuesday, stocks were sharply lower and bond yields has plummeted to previously unthinkable

lows as investors sought a safe place to park their money.”

In my opinion, the monetary policy affects investment from people, that’s why it needs

more time than the fiscal policy to really affect the market (chapter 15). But the authors of the

article stated that this situation “reflects a recognition that cutting interest rates will do little to

contain the virus that has sickened more than 90,000 people …” Also, in the history of Fed,

“Over the last two decades, stocks have had a mixed response on the day of surprise Fed actions,

a sign that the central bank's support is not always enough to overcome a risky backdrop.”

Mr. Jerome Powell, Chairman of Fed, has said that “We do recognize that a rate cut cannot

reduce the rate of infection, it won’t fix a broken supply chain. We get that — we don’t think we

have all the answers.” And also another reason for the negative impact the market has to suffer is

that although the interest rates has been cut down to from 1 to 1.25 percent, it still can’t prevent

the spread of coronavirus or help the companies to deal with sick workers. This has created a

situation of “supply shock”, which I think our class has learnt from chapter 15: if the workers got

sick, they can’t come to work (the problem with input), so the output can be affected too. A mass

amount of product has to be missed, therefore leads to the serious decline of goods (the supply

shock).

In conclusion, I think that this emergency rate cut of Fed can’t do much for the economy

until we find out the way to stop the spread of this infected virus.

Citations:

Smialek, Jeanna, and Jim Tankersley. “Fed Makes Emergency Rate Cut, but Markets Continue
Tumbling.” The New York Times, The New York Times, 3 Mar. 2020,
www.nytimes.com/2020/03/03/business/economy/fed-rate-cut.html.