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On Sunday, the Federal Reserve bowed to the inevitable.
In the face of market turmoil brought on by the rapid spread of the novel coronavirus, the Fed essentially declared a national emergency by slashing the federal-funds rate a full percentage point to 0%-0.25% for the first time since the financial crisis and pledging to buy at least $700 billion of U.S. Treasurys and mortgage-backed securities three days before its next scheduled policy-setting meeting .
Investors gave a thumbs down by dumping stocks DJIA, -8.76% SPX, -8.25% and buying Treasurys.
READ: Dow skids 1,900 points following trading halt as emergency Fed action fails to calm nerves
Bottom line: Investors don’t think the Fed’s moves are enough. What’s missing is massive fiscal stimulus, which has yet to take place. And there are real obstacles to that — trillion-dollar deficits and intense partisanship that has prevented what used to be slam-dunk bipartisan reforms. Fiscal irresponsibility, toxic politics and a Fed that was too afraid to offend stock investors have combined with the coronavirus, a black swan if there ever was one, to create the current crisis whose resolution right now looks murky.
One crisis after another, plus the persistence of the “Greenspan put,” kept the Fed from raising the federal-funds rate anywhere close to the 5.25% it hit before the financial crisis. It took three years for the FOMC to raise fed funds from 0%-0.25% to a mere 2.25%-2.5%, but only a year to do a round trip back to zero.
Now, as Fed Chairman Jerome Powell pointed out at his press conference, the ball is in the federal government’s court. But its hands may be tied, too. The massive 2017 tax cuts, which primarily helped wealthy taxpayers and big corporations, provided a small, temporary boost to economic growth, but they and the subsequent feeding frenzy of spending increases approved by the Republican Congress have left us with a $1-trillion federal deficit even before the economic effects of the coronavirus epidemic ripple through the economy.
Most economists agree recoveries are times to fill the federal coffers and crises or recessions are the time to spend the money. But there’s little room for the huge fiscal stimulus some economists say is needed to fight this crisis.
Which brings us to politics. For decades, polarization has been increasing sharply in Washington, D.C. And let’s not mince words here; it’s been driven by a rapid move to the extreme right by the Republican Party, from the Tea Party to the election and mass worship of the faux populist Donald J. Trump.
And yes, the Democratic Party has moved leftward, but not as much as Republicans have moved to the right. First in the 2018 elections and even more in the 2020 primaries, moderate mainstream Democrats have repudiated Sen. Bernie Sanders (I-Vt.) and the far left.
The GOP’s extreme rejectionist politics first appeared in the heat of the financial crisis when House Republicans voted down the Bush administration’s Troubled Asset Relief Program (TARP). They reversed themselves after the Dow Jones Industrial Average slumped. But the same hatred of the federal government persists.
The impeachment of President Trump pushed partisan divisions to the breaking point. Last week Treasury Secretary Steven Mnuchin negotiated the modest coronavirus relief package with Speaker of the House Nancy Pelosi (D-Calif.) because the president reportedly refuses to talk to her. (The Senate was out of town for the weekend and has yet to vote on the bill.)
President Trump has yet to propose a massive fiscal spending package — both Democrats and Republicans burst his payroll-tax-holiday trial balloon — and if things unravel more, we may get one, though the looming presidential election complicates things. As investors clamor for some kind of certainty — or at least leadership —the Fed is out of ammo, the federal government is fiscally tapped out, and the factionalism Washington and Madison warned about is tearing the country apart.
READ: America is so divided because federalism isn’t working
Yes, indeed, the chickens are coming home to roost, but this time they’re infected by a deadly virus.
Howard R. Gold is a MarketWatch columnist. Follow him on Twitter @howardrgold.
