蘑菇视频

Mar 5, 2020 By Gary Boatman for The 4 min read

On Tuesday, the Federal Reserve lowered interest rates another half a point. I think this should cause great concern. The Fed has two main jobs. When the economy is overheating, they take actions such as raising interest rates to slow it down. If it cost more to borrow money, people will make less major purchases that must be financed. As less is purchased, the economy slows down.

This is often measured by the inflation rate. High inflation erodes our purchasing power and makes it difficult to buy the things we need. South American countries and others that have experienced very high inflation had a lot of civil unrest.

When the economy is too slow or in recession, the Fed takes action to stimulate the economy by doing things such as lowering the interest rate or quantitative easing. Unemployment is typical high during recessions and the Fed wants an economy where everyone who wants one, can find a job.

Typically, most federal banks would like to see an inflation rate of about two percent. This is about the level we have been running at for some time. It is widely known that unemployment is at a 50-year low. The economy is running along better than it has for a long time, although there are some areas of concern.

The Feds next regular scheduled meeting is March 18. This is the first time since 2008 that they called a special meeting to cut interest rates. At that time, we were beginning the Great Recession and the stock market crashed because of the housing crisis. That was a financial crisis.

Today, we are facing a health crisis. Yes, it has some financial elements. The coronavirus that started in China offers new medical challenges. As the virus has expanded, it shut down production in China. These factories supply many goods sold in the US. This has obviously slowed the economy in China.

Since this virus outbreak is only a few weeks old, it has not affected too much of our supply chain yet. It could have some influence on our economy in the future since a consumer spending is our most important economic driver. We have seen the virus affect more countries including some cases in the US. No one knows if it will last a few weeks or much longer.

The stock market is diving because people panic and start selling. It becomes a selling frenzy. The more people who sell, the faster it goes down because it is the biggest auction in the world. Your investment in the market should be long term not for the immediate time. If you have a long enough time frame until you need this market money, short term reactions do not matter. If all of your retirement money is in the market and you just retired, you have a major issue. We have discussed sequence of risk several times over the past year. This is when big losses early in or right after starting retirement can wipe out savings.

I am afraid that the Fed is using their tools at the wrong time when dealing with this current crisis. After this cut, interest rates are only between one and one and a quarter percent. Wall Street believes rates will be cut again on the 18th of March. What happens if this becomes a full blown financial issue instead of a health issue with some short-term financial affect? Will we be like some foreign countries and have negative interest rates where you pay the government to hold their bonds?

I sure hope not.

Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, 鈥淵our Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.鈥� If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.