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

US stockmarkets shrug off signs of overheating
US stockmarkets

US stockmarkets shrug off signs of overheating

Signs of overheating in the markets are everywhere, but that didn't stop US stocks hitting new record highs last week.
29 Jan 2021
US stockmarkets shrug off the mob's rampage through the US Capitol building
US stockmarkets

US stockmarkets shrug off the mob's rampage through the US Capitol building

US stockmarkets seem more interested in the results of Senate elections in Georgia than on the lawless mob's raid on the country's Capitol building.
14 Jan 2021
US inflation is rising – but it’s not enough to rattle markets yet
Inflation

US inflation is rising – but it’s not enough to rattle markets yet

The latest US inflation figures showed that consumer prices are rising more rapidly than expected. But markets shrugged. John Stepek asks why, and wha…
14 Apr 2021
Coinbase, America’s largest crypto exchange, is going public. Should you invest?
US stockmarkets

Coinbase, America’s largest crypto exchange, is going public. Should you invest?

Cryptocurrency exchange Coinbase is to list on the Nasdaq stock exchange, hoping to cash in on the current crypto-mania. Saloni Sardana looks at wheth…
13 Apr 2021

Most Popular

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?
Bitcoin

“Joke” cryptocurrency dogecoin goes to the moon. What’s going on?

Dogecoin – a cryptocurrency created as a joke – has risen by more than 9,000% this year alone. Saloni Sardana looks at how something that began as an …
19 Apr 2021
China owns a lot more gold than it’s letting on – and here’s why
Gold

China owns a lot more gold than it’s letting on – and here’s why

In a world awash with money-printing, a currency backed by gold would have great credibility. And China – with designs on the yuan becoming the world’…
21 Apr 2021
Why investment advice could be about to get a lot cheaper
Investment strategy

Why investment advice could be about to get a lot cheaper

Vanguard, the world’s second-biggest asset manager, is launching its own cut-price financial advice service. It’s something the industry badly needs, …
20 Apr 2021