Despite the Federal Reserve’s 50 basis point emergency rate cut, equities could not build on Monday’s rally and instead crumbled. The allure of safe assets could not be beat as the 10-year treasury yield slipped below 1%. Financial markets will continue to struggle until market participants gain some clarity on the economic implications of the outlook. Fed rate cuts will be a necessity during this period, but won’t be a magic bullet. This crisis will take some time to work through. The less competent the federal response, the more time it will take.

The Fed’s statement was short and to the point. Policy makers decided that the coronavirus presented “evolving risks to economic activity” and justified a rate cut despite strong economic fundamentals. In the also-short press conference, Chairman Jerome Powell noted supply chain and travel-related challenges. The spread of the virus in U.S. cities made further disruptions more likely. A rapid response was judged appropriate.

The Fed’s rapid response reveals the extent of its evolution over the past year. Powell’s Fed has a heightened concerned about the risk of recession. With inflation still low – and too low in the eyes of some Fed officials – the Fed sees little downside risk to acting early and substantial potential upside reward. If early action short-circuits the development of recessionary dynamics, then they may squeeze through this episode without returning to the zero bound.

Financial market participants did not appear to find the Fed’s actions calming. Still, the action may not have reflected disappointment with the Fed. It is reasonable to believe that Monday’s rally reflected the anticipation of the Fed rate cut and with that cut in hand market participants re-positioned and shifted focus back on the economic implications of the coronavirus.

I suspect we will see that story play out more than once in the days ahead. We still seem to be a long way from having any clarity on the extent of the crisis. And the clarity we are getting so far isn’t all that encouraging. It appears that federal authorities bumbled the initial response with limited testing activity. The virus may have been circulating for weeks, undetected because no one was looking for it. Consequently, containment will be more difficult than would be the case with early and aggressive testing.

Considering the unknowns, market participants will tend to focus on the more severe of the potential outcomes. The sharp drop now being reported in Chinese manufacturing activity is not so much a surprise given the extent of the closures but still helps bring the downside into focus. Is that what is in store for the U.S.? We don’t know. What we do know is that incoming news is likely to be more depressing than not.

Given the lack of clarity, a risk-on environment will not come on the back of rate cuts alone. Easier policy is needed to support financial market function and create the accommodation that will support a return to activity when the crisis ends. But it might not diminish risk aversion in the near term. For the time being, we may be a in a one-step forward, twos-steps back phase of market reactions to news and policy.

Eventually, that will shift back to two-steps forward, one-step back. There will be another side to this crisis. We just can’t see it yet. If you are looking for some optimism, Bloomberg reports that rising pollution levels in China indicate the country is getting back to work.

Bottom Line: The Fed will deliver more rate cuts in the weeks ahead. Just because they are not met with immediate market gains doesn’t mean they aren’t necessary or won’t be effective in supporting the economy. In the near-term, the negative news flow and lack of clarity on the outlook will tend to depress risk appetites and thus market participants may not react as jubilantly to Fed policy moves as they might in a different economic environment.