Strategy & economics
Caspar Rock's market insights: video
Over the weekend the Federal Reserve cut rates again and announced a range of other supportive measures including a significant new programme of asset purchases known as “quantitative easing” or QE. This is a repeat of the actions taken following the financial crisis.
Will these measures alone “fix” the problem? That is unlikely. But the start of QE by the Federal Reserve, combined with other similar actions by central banks around the world, look more and more like a coordinated monetary policy response.
Recent market crises have a followed a pattern
In periods of market stress over the past decade, we have generally seen the following sequence: first, levels of volatility stopped rising. Then, afterwards, the market eventually bottomed.
The first thing markets need is to become comfortable with the level of uncertainty. Only then can they become comfortable with the level of prices.
Likelihood of recession increases
A technical global recession in response to a combination of a supply disruptions and a sudden stop of demand now appears more likely.
Against this backdrop, the task at hand for governments and central banks has been – and continues to be – to ensure that the recession stays relatively short-lived, and doesn’t morph into a more prolonged slump in activity.
A very large coordinated fiscal response is required to support individuals and businesses adversely affected by the crisis. Such a response is now underway in many countries.
Public borrowing to rise
Tax relief, transfers to individuals and subsidies to firms will increase current budget deficits significantly. Moreover, government guarantees for bank loans to companies will increase implicit government liabilities and may lead to higher future deficits.
Thus, one consequence of the crisis will be even higher levels of public sector debt in the future.
Another consequence of the crisis will be that monetary policy will be increasingly dominated by fiscal considerations – a trend that has been underway for a time already, and is now likely to accelerate further.
This fiscal-monetary coordination is not necessarily a bad thing.
In fact, it is exactly what is needed at a time of crisis when the conventional tools of monetary policy are largely exhausted.
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