Global financial conditions continue to flash red as global central banks acted forcefully to address the economic and financial effects of the COVID-19 virus. The Federal Reserve put a punctuation mark on monetary policy on Sunday, dropping the fed funds rate back to the zero lower bound (ZLB), boosting asset purchases, opening dollar swap lines and reducing the rate it charges at its discount window. It’s safe to say that the Fed has done just about all it can on its own.
Anything of substance from here on out will require the consent of the U.S. Treasury Secretary, Steven Mnuchin, consistent with section 13(3) of Dodd-Frank. Any substantial action that will occur is now in the hands of the fiscal authorities, and that’s not likely to boost anyone’s confidence in the financial markets.
Monetary conditions in the United States, Canada and the U.K. have deteriorated to the extent that the respective central banks have cut rates by what is normally an unprecedented 50 basis points, much less the 100-basis-point drop the Fed imposed on March 15. U.S. financial conditions are 3.7 standard deviations below normal levels of stress in the financial markets. EU financial conditions are 3.6 standard deviations below neutral. The last time this occurred was in the days before the collapse of Lehman Brothers in 2008 and the global financial crisis.