Mar 6, 2020 4 min read

On Tuesday, the Federal Reserve lowered interest rates another half of a percentage point. I think this should cause great concern.

The Fed has two main jobs. When the economy is overheating, it takes actions such as raising interest rates to slow it down. If it costs more to borrow money, people will make fewer 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 have had a lot of civil unrest.

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

Typically, most federal banks would like to see an inflation rate of about 2%. 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 Fed’s next regular scheduled meeting is March 18. This is the first time since 2008 it has 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 started in China and offers new medical challenges. As the virus has expanded, it shut down production in China. These factories supply many goods sold in the United States. 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 because consumer spending is our most important economic driver. We have seen the virus affect more countries, including some cases in the United States. No one knows whether 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 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 future. 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 the Fed is using its tools at the wrong time in dealing with this current crisis. After this cut, interest rates are between only 1% and 1.25%. Wall Street believes rates will be cut again March 18.

What happens if this becomes a fully blown financial issue instead of a health issue, with some short-term financial effect? Will we be like some foreign countries and have negative interest rates, where you pay the government to hold its bonds? I surely hope not.

Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”

To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.