If one wanted evidence that the stock market is the major driver of US policies, one need look no further than the decision yesterday by the Federal Reserve to lower interest rates by half a percentage point, a large amount.
Launching the emergency measure as a pre-emptive strike to protect the US economy after pressure from Donald Trump to act, the Fed warned: “The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity.”
Jerome Powell, its chair, said: “Of course the ultimate solutions to this challenge will come from others, particularly health professionals. We can and will do our part, however, to keep the US economy strong as we meet this challenge.”
Normally the Federal Reserve adjusts interest rates in response to major economic factors, such as concerns about the levels unemployment or economic growth, based on its analysis of the data. But this latest move seems to have been prompted by the sharp drop in stock prices due to the fears over the impact of the coronavirus.
It is true that there are fears that the global spread of the virus could led to disruptions in trade and in the complex supply chains that companies now have. It may also be true that this drop in the interest rates, by making borrowing by businesses cheaper, may enable companies to explore way to find remedies, even though it is not clear how.
But that still leaves the suspicion that this was done primarily to boost stock prices.
Yesterday, the markets dropped sharply despite the Fed’s move. Today they rose and that is being attributed to Joe Biden’s good showing on Super Tuesday. Biden has been a loyal supporter of business interests and a presidential race between him and Donald Trump would be one that big business would favor since both would be very friendly to them. But it is always guess work as to what drives stock prices up and down on any given day, so these glib explanations should never be taken seriously.