Finance, Business

Markets whipsawed by policy uncertainty

27 March 2020

Markets whipsawed by policy uncertainty

The Fed’s decision to effectively remove any limits on quantitative easing, establish facilities for the purchase of corporate bonds in the primary and secondary markets, along with support for municipal lenders, represents a significant escalation of its monetary policy support. The Fed has now broken out its entire financial crisis “arsenal” to ensure that markets function in an orderly manner. But while the Fed’s actions are critically important steps in helping stabilise market function, they are insufficient to compensate for the massive economic damage caused by the measures imposed to contain the COVID-19 outbreak. And, for now, in the absence of the fiscal spending proposal which would allow monetary policy to be leveraged more effectively, its impact will be more muted.

In Europe, following aggressive monetary policy actions by the European Central Bank last week, EU leaders continue to work on trying to deploy additional fiscal measures. Three options are reportedly being considered: precautionary European Stability Mechanism credit lines to a number of member countries, liquidity facilities specifically focused on healthcare spending, and the joint issuance of “coronabonds.” Though Germany is not yet on board with the third option, the country seems increasingly willing to support other member countries. European leaders are scheduled to hold a video conference to decide on these options on Thursday.

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