Global Governments Unleash Viral Response to World's Economic Ills

    Facebook Twitter LinkedIn Email

By Anna Snyder - March 16, 2020

As the COVID-19 outbreak spreads worldwide, central banks and government officials are injecting massive monetary stimulus into the global economy. The Federal Reserve (Fed) slashed interest rates in a rare Sunday afternoon announcement—its second emergency rate cut this month. Despite these efforts, investors remain skeptical that these emergency measures will ward off a global recession, fueling market volatility.

We haven’t seen a meaningful fiscal response. Yet, we believe there’s currently growing demand for major support packages.

Fed Makes Second Emergency Rate Cut

On March 15, the Fed cut its federal funds rate target a full percentage point to a range of 0% to 0.25%. It also added $700 billion in new purchases of U.S. Treasury and mortgage-backed securities (MBS) and implemented a variety of programs designed to stabilize the banking and financial systems.

The Fed’s actions can’t prevent an economic downturn, but policymakers hope to prevent worsening financial conditions by assuring ample liquidity.  At a minimum, the Fed’s recent moves may help the Treasury and MBS markets, where liquidity conditions were becoming exceedingly tight. The last time the Fed took such measures was during the 2008 financial crisis.

Fiscal Efforts Underway in the U.S.

So far, the U.S. fiscal policy response adds up to less than 0.3% of gross domestic product (GDP). It includes an $8 billion aid package to develop virus treatments and provide financial support to states. President Donald Trump also declared a national emergency on March 13, freeing up an additional $50 billion in federal funding.

Last week, the U.S. House of Representatives passed legislation making virus-testing free and providing paid sick leave for workers affected by the disease. The bill has moved to the Senate for consideration. The size of the current deal is unclear, but we expect a $200 billion to $300 billion (0.9% to 1.4% of GDP) package in this round. The total dollar amount may even be larger, given the growing bipartisan support for a massive fiscal response. Lawmakers are also working on a broader economic plan to help struggling businesses and individuals.

Social distancing measures have led to broad shutdowns in the U.S. Data highlighting the drag on economic growth are just coming in, but we expect growth to decline significantly in the coming two quarters. Early signals support this expectation: The New York Fed’s Empire Survey of Business Activity   posted its largest drop ever in March.

Other Nations Limited in Their Response Options

Unlike the Fed, central banks in Europe and Japan have few monetary options left. Rates are already very low, and monetary policy is accommodative.

Policy rates in Europe have been 0% or lower since 2016, and the European Central Bank (ECB) relaunched a bond-buying program late last year. On March 12, the ECB announced a stimulus program aimed at injecting money into the economy and supporting bank lending. However, it did not cut its key policy rate, which disappointed markets.

Similar to the ECB, the Bank of Japan has little room left to act. Interest rates have been -0.1% since 2016. At an emergency meeting on March 16, policymakers increased the pace of their asset purchases and announced a new loan program. But they also didn’t cut their key policy rate.

So far, politics and high debt levels have limited governments’ ability to deliver fiscal responses. In the eurozone, severe economic shock is likely—they’ve been hit hard by the virus. Yet European leaders still haven’t offered a coordinated fiscal response. In Japan, there’s growing demand for more stimulus. But massive debt is tying the government’s hands. Japan’s debt-to-GDP ratio stands at more than 280%--the highest in the world.

Today’s Troubles Are Economic, Not Financial

In the 2008 financial crisis, we experienced a run on the financial system. Today’s market volatility, however, has more to do with economic uncertainty.

The Fed is using everything in its toolbox to keep the system well-oiled—including ultra-low interest rates. These moves may ultimately support markets in big ways. However, virus prevention measures, such as social distancing and quarantines, are limiting the near-term effectiveness of that stimulus. People stuck at home tend to spend less money.

That said, once economic conditions start to improve, we expect markets to stabilize—possibly toward the second half of this year.

Coordinated Response is Necessary

We think the Fed and other central banks will continue to try and assure markets. This means they may continue their hyper-aggressive support for as long as necessary.

We also believe we will need substantial fiscal support to prevent a sharp global recession. This support may look like:

  • Economic policies meant to stabilize markets by setting a floor on how far they can fall.
  • Stimulus packages to get consumers spending again.
  • Targeted support to help households and firms hardest hit by the virus.

Policymakers may have been slow to answer the growing economic issues with fiscal packages. But we think they will ultimately do whatever it takes to prevent a sharp slowdown this year.

We believe the best course in these trying times is to remain calm, focused and diversified. For most long-term investors, now is not the time to change course or abandon a carefully crafted investment strategy.

    Facebook Twitter LinkedIn Email
Anna Snyder
Anna Snyder
Sr. Analyst
Global Fixed Income
  • Related Articles

Global Governments Unleash Viral Response to World’s Economic Ills

COVID-19 continues to spread, and countries are ramping up their responses to protect vulnerable economies. Will their efforts pay off?

Panic And Perspective

Markets may have panicked today, but we think it’s best if investors respond with poise and patience instead.

Fed Prescribes Rate Cut for Virus-Related Economic Ills

The Federal Reserve surprised markets with an emergency 0.50% rate cut on March 3. Our investment managers explore the move and potential market responses.

    Diversification does not assure a profit nor does it protect against loss of principal.

    Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

    The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

    American Century Investments is not responsible for and does not endorse any comments, content, advertising, products, advice, opinions, recommendations or other materials on or available directly or via hyperlinks from Facebook, Twitter or any third-party website. Facebook, Twitter and LinkedIn are registered trademarks of their respective owners.