Will rate cuts stave off a U.S. recession?
BERKELEY, Calif. - The Federal Reserve cut interest rates a full half point on Tuesday to ward off concerns about the economic damage from conronavirus/COVID-19. But, the stock markets' continued negative reactions suggests, that for the first time in more than a decade, that the specter and conditions for a worldwide recession are real.
Is a recession a real possibility? "We could have one. There are very certainly darkening clouds that have now come over the economy," said James Wilcox, UC Berkeley Professor on Economics of the Haas School of Business. He says he was surprised by the speed and the big interest rate cut, a cut of this size we haven't seen since the great recession. "I think the Federal Reserve was trying to signal that it's paying really close attention and it's willing to as much as it can to help soften the blow to the U.S. economy."
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Wilcox said the worldwide impact of the virus to commerce and trade could bring about a recession. "I don't think the problem is going to be easily cured by interest rate cuts; no matter how many of them we might make from here on or wish we could make," said Wilcox. He also said a recession will come, especially if this happens. "Consumers and also businesses deciding that they don't want to spend right now. That tends to ripple on and affect how many employees and the hours those employees would work and how much they, in turn would be willing to spend and it will ripple into somewhat higher unemployment."
With lower rates, Wilcox said home refinancing is likely to boom, putting extra cash into the borrowers pockets. That would help, since 70% of the U.S. economy is supported by overall consumer spending.
But those with credit card debt, will get little relief, making paying more than the monthly minimum a high priority. "It will have little difference for the typical borrower. If you have the average credit card debt, $5,700 according to the Fed, your monthly minimum payment is only going to go down about $2 a month," said CreditCards.com analyst Ted Rossman.
Professor Wilcox says that right now, both parties need to pass stimulus legislation to be signed by the president if needed, especially to make sure there's plenty of money to lend to small businesses to weather the storm.