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Why the US Federal Reserve is damned if it unleashes more coronavirus stimulus, and damned if it doesn’t
- Unprecedented levels of stimulus to avert a 2008-style credit crunch have stabilised markets to the point that it is almost like the pandemic never happened
- The strength of the recovery could make it more difficult for the Fed to justify continued measures to spark the economy
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Why you can trust SCMP
It was possibly the most telling moment in financial markets since asset prices began rising sharply in late March despite the economic devastation wrought by Covid-19.
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On Monday, the National Bureau of Economic Research, an academic research group that serves as the arbiter of America’s business cycles, declared that the US entered a recession in February, putting an end to the country’s longest expansion on record. The same day, the S&P 500 index closed in positive territory for the year, having surged 42 per cent since March 23, its fastest advance since 1933, data from Bloomberg shows.
Markets are forward-looking, so it stands to reason that, given the increasing signs during the past several weeks that the global economy has bottomed out, sentiment has improved significantly.
Yet the ferocity of the rally, in the face of the deepest recession since the Great Depression, has the fingerprints of the world’s most influential central bank all over it. The unprecedented stimulus from the Federal Reserve, which has gone “all in” to avert a 2008-style credit crunch, has not only helped stabilise the financial system, it has revived markets’ animal spirits, so much so that it is almost as if the pandemic never happened.
In an indication of the scale of the liquidity support provided by the Fed, it is expected to purchase US$100 billion in Treasury bonds this month alone. The pace of buying is “substantially higher than observed over any of the previous [quantitative easing] programmes a decade ago”, JPMorgan noted in a report published on May 28.
While other leading central banks and governments have also pledged to do whatever it takes to counter the economic fallout from the coronavirus, the Fed’s actions have been the most consequential for markets. This is especially true for the corporate debt market, long viewed as the canary in the coal mine for broader sentiment.
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