Are Interest Rates the "Cure" to a Covid-19 Recovery?
In short, the answer to this question is unclear. The conditions surrounding the coronavirus-recession are unprecedented and the symptoms of those conditions created an “economic-illness” for which we have no diagnoses. High levels of permanent unemployment, low consumer demand, stagnant inflation, and political deadlock have made it impossible for officials to use conventional methods of attack on an unknown pathogen. Although most leaders have no answer, the Federal Reserve seems to think ‘zero-percent’ interest rates could be our economy’s vaccine. While it may seem simple, one might agree with the Fed’s tactic given what they have been able to do since March.
Before continuing, it’s important to note that the stock market and the economy are two separate entities that are related but not particularly in-step with one another. Although the economy has not seen much of a recovery since this summer, the stock market has been booming hitting a new record high approaching 2021. Companies that have been able to drive market growth have benefited from having huge amounts of cash-on-hand. Thanks to the Feds interest rate strategy, companies who could not survive can borrow money for free and hoard cash throughout the recession. These cash deposits have increased cash flow from operations, maintained or raised stock prices, and allowed a considerable amount of faith to remain in the market.
While corporate earnings have fallen by 31% since March, the S&P 500 paid more dividends than it earned. Stock dividends were expected to fall by 20% but somehow, they have moved less than 1%. One must ask, how do earnings fall, and how does the economy tank while dividends are still being paid? Is this temporary ‘free’ cash going to run out and expose an even larger issue? How will companies who aren’t meeting earnings expectations pay off these massive debts? The answers to these questions, again, are unclear. While low rates will influence immediate demand amongst consumers and firms, how will it combat unemployment, poor earnings, and massive contraction in middle-class spending? From this perspective, it looks like a short-term solution to what could be a long-term issue.