Coronavirus: America's central bank "goes nuclear" as politicians act

The US Federal Reserve, America's central bank, signalled that it would do practically anything to end the turbulence and help the American economy.

Talk about doped to the gills. This week rattled and liquidity-addicted equity markets received the biggest monetary and fiscal stimulus on record. So it’s no wonder they went nuts – at first. Tuesday saw the S&P 500 gain 9.4%, the biggest daily jump since 2008. The FTSE 100’s 9.1% rise was its second-best daily showing on record. 

Congress delivered a $2trn stimulus on Tuesday, while the “Federal Reserve has gone nuclear”, as Robert Guy puts it in the Australian Financial Review. The world’s most powerful central bank’s embrace of unlimited quantitative easing, or money printing – dubbed “QE Infinity” – will be remembered as a “defining moment” not only in this crisis, but in “the history of central banking”. 

Fixing the world’s financial plumbing

The Federal Reserve had already slashed interest rates to near-zero and announced a $700bn quantitative easing package but even that did not calm gyrations in markets. Panicking global investors continued to dump assets of all kinds in favour of the dollar, the global reserve currency. That was generating a worldwide dollar shortage and putting dangerous strains on credit markets at a time when corporations and governments desperately need ready cash to respond to the Covid-19 pandemic.

On Monday the Fed signalled that it would “do practically anything” to end the turbulence and help the American economy, writes Nick Timiraos for The Wall Street Journal. It is throwing “another kitchen sink” at wobbly credit markets. Its purchases of Treasury and mortgage-backed securities with printed money will now be unlimited. For the first time, it will also start buying “investment-grade” corporate debt, thus supporting the market at the centre of current concerns about business solvency. 

The move is designed to quell two distinct crises, says Neil Irwin in The New York Times. First, financial markets are “breaking down” in some of the same ways as in 2008. Markets had become trapped in a vicious cycle: asset prices fall, creating more fear and demand for cash, generating more asset sales and causing credit markets to seize up. Second, it is trying to ensure that a liquidity crisis does not generate a mass wave of bankruptcies as otherwise solvent businesses affected by the coronavirus go to the wall. The Fed has shown that it will “do anything... on any scale” to end the dollar shortage. The Fed’s move halted the global rush into the greenback at the start of this week; the greenback fell sharply. 

Politicians step up

The Fed, however, can only address the financial framework; it can’t directly pre-empt or rectify any damage done to livelihoods by the Covid-19 crisis. Enter the stimulus package, which can. But whether it will be enough to tackle the impact of the virus and redress some of the frightening forecasts of the economic damage it will cause is not yet clear. The cooling enthusiasm on equity markets by the middle of the week suggests investors remain unconvinced. 

Recommended

Imperial Brands has an 8.3% yield – but what’s the catch?
Share tips

Imperial Brands has an 8.3% yield – but what’s the catch?

Tobacco company Imperial Brands boasts an impressive dividend yield, and the shares look cheap. But investors should beware, says Rupert Hargreaves. H…
20 May 2022
What's behind Sri Lanka’s crippling debt crisis?
Emerging markets

What's behind Sri Lanka’s crippling debt crisis?

Sri Lanka has been hit by a triple whammy of economic shocks and has gone to the IMF for a bailout. It may just be the first domino to fall in a globa…
20 May 2022
Investing in drugmakers: uncommon profits from curing rare diseases
Share tips

Investing in drugmakers: uncommon profits from curing rare diseases

Treatments for medical conditions with only a small number of sufferers can still be very attractive for pharmaceutical companies and investors becaus…
20 May 2022
Share tips of the week – 20 May
Share tips

Share tips of the week – 20 May

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
20 May 2022

Most Popular

The ten highest dividend yields in the FTSE 100
Income investing

The ten highest dividend yields in the FTSE 100

Rupert Hargreaves looks at the FTSE 100’s top yielding stocks for income investors to consider.
18 May 2022
Aviva: a share for income investors to tuck away
Share tips

Aviva: a share for income investors to tuck away

Insurance giant Aviva is one of the highest yielding stocks in the FTSE 100 – and it’s cheap, too, making it a tempting target for income investors. R…
18 May 2022
Inflation is now at its highest since 1982 – is this the peak?
Inflation

Inflation is now at its highest since 1982 – is this the peak?

At 9%, UK inflation is at its highest for 40 years – and it’s not going anywhere soon, says John Stepek. That means you need to be much more active a…
18 May 2022