In a bid to combat the coronavirus pandemic that has paralyzed large parts of the world’s economy, the United States Federal Reserve and its global counterparts moved aggressively with sweeping emergency rate cuts and offers of cheap dollars.
The coordinated response from the Fed to the European Central Bank (ECB) and the Bank of Japan (BoJ) were reminiscent of the steps taken just over a decade ago in the wake of the financial crisis.
The moves came amid a rout in stocks and bond markets as investors anxiety deepened over the difficulty of tackling a pathogen that has left thousands dead and put many countries under virtual lockdowns.
The Fed moved first on Sunday, cutting its key rate to near zero and triggering an unscheduled easing by the Reserve Bank of New Zealand (RBNZ) to a record low as markets in Asia opened for trading this week.
“The virus is having a profound effect on people across the United States and around the world,” Fed Chair Jerome Powell said in a news conference after cutting short-term rates to a target range of 0% to 0.25%, and announcing at least $700 billion in Treasuries and mortgage-backed securities purchases in coming weeks.
Australia’s central bank joined in by pumping extra liquidity into a strained financial system and said it would announce more policy steps on Thursday.
Also the Bank of Japan stepped in by easing monetary policy further in an emergency meeting, ramping up purchases of exchange-traded funds (ETFs) and other risky assets to combat the widening economic fallout from the coronavirus epidemic.
“The BOJ will take additional monetary easing steps as needed without hesitation with a close eye on the impact from the coronavirus epidemic for the time being,” it said in a statement after a hastily called emergency meeting.
The measures did little to calm market nerves though, as Asian shares and U.S. stock future plummeted, underscoring the fears the health crisis might prove much more damaging to the global economy than initially anticipated.
France and Spain joined Italy in imposing lockdowns on tens of millions of people, while the United States saw school closings, runs on grocery stores, shuttered restaurants and retailers, and ends to sports events.
“Market reactions to each surprise monetary policy easing have been sell first and ask questions later. The more unprecedented measures by the Fed and other central banks, the more investors worry if (they) know something we don’t… fear remains the crux of the problem here as market players remain unconvinced that monetary policy easing and liquidity injections will solve an essentially healthcare crisis,” said Selena Ling, head of treasury research and strategy at OCBC Bank in Singapore.
Five other central banks cut pricing on their swap lines to make it easier to provide dollars to their financial institutions, ramping up efforts to calm credit markets.