The Fed action was in reaction to the steep drop in U.S. stock prices, which had fallen in a little over a week by 15% from record highs in mid-February. Stocks in the United States and around the world were hit hard by the new coronavirus (COVID-19) epidemic.

The U.S. stock market was on a roller coaster Tuesday. It began the day falling more than 1% after a big rise on Monday. Then with the Federal Reserve cut in interest rates, stocks rose almost 4%, but then soon gave back all of the gains and ended the day down about 3%, with the headline Dow Jones Industrial average down almost 800 points.

The problem, which the Fed admitted, is that the rate cut will do little to spur spending if people are worried about travel or going out to restaurants or the mall because of the virus. Even worse, lower interest rates will do nothing to offset the growing supply chain disruptions as parts from China and now south Korea are becoming unavailable with widespread shutdowns of businesses.

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San José, CA – On Wednesday, August 14, the U.S. stock market tanked, with the Dow Jones Industrial Average down 800 points, or 3%. The technology-heavy NASDAQ index also fell 3% and the S&P 500 fell just shy of 3%. This is the third day in a row of major market moves: Down more than 450 points on Monday, up 375 points on Tuesday, and now down again.

The Monday move came on because of growing recession fears, but the stock market bounced back on Tuesday, when Trump announced that he was postponing the 10% tariff on imports from China on more than half of the goods originally scheduled to be tariffed September 1. The postponement came on cell phone, computers, toys and other goods that make up more than 75% of U.S. imports that come from China, as well as baby supplies deemed necessary. However more than $100 billion in imports from China are still on track to face tariffs next month. These are mainly consumer goods, with women and girls clothing among the hardest hit.

While Trump tries to come off as a tough guy and hard negotiator, the fact of the matter is that he blinked in the face of Chinese resistance. Trump also admitted for the first time that U.S. consumers would be hit, whereas before he maintained that China was paying the tariffs. The postponement allows stores to stock up for their holiday sales without paying the tariffs.

But despite the relief rally on Tuesday, on Wednesday things went from bad to worse. First came disappointing economic reports from China. Over the last ten years China has made a lot of progress in bringing down its overall trade surplus (selling more exports than it imports). By ramping up its imports, the Chinese economy has become ever more important to other countries’ economies, including for example, U.S. farm exports. While its economic growth is still awesome by any other large economy’s standards (still about 6% as compared to 2 to 3% in the United States and even less in Europe and Japan), any slowdown in Chinese economic growth will affect other countries.

Then, as the world turned, there came a report out of Germany that their Gross Domestic Product (GDP, or the total production of final goods and services) actually contracted by a small amount in the second quarter of this year. Germany has the largest economy in Europe and is the fifth largest in the world. Germany is also the world’s third largest importer of goods and services, so like China, any slowdown will impact other countries.

Then when financial markets opened in the United States, interest rates on the ten-year U.S. Treasury Bonds briefly fell below the interest rate on the two-year bond. This was another ‘inversion’ of the bond interest rate yield curve, where typically higher long term interest rates fall below shorter term ones, indicating the economy will be much worse in the future. It is seen as one of the strongest financial market warnings of a coming recession.

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Bank of America raised the risk of recession in the next year to one in three, while U.S. bond interest rates continued to fall. The ten-year U.S. Treasury Bond interest rate fell again to about 1.5%. Lower bond interest rates show that investors expect economic growth to slow at best, and the economy to fall into recession at worst. The so-called ‘inverted yield curve,’ where long-term interest rates on bonds fall below shorter-term interest rates continue to flash a warning of a coming recession.

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