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The Federal Reserve and the Pandemic of 2020

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Daniel McDowell, Aditi Sahasrabuddhe and Kindred Winecoff have a terrific explainer on what the Fed is doing in the face of growing global economic crisis. They focus on four points:

  1. The Fed quickly moved into crisis-fighting mode;
  2. Reaching for ‘swap lines’ suggests global financial threats;
  3. Domestic and international considerations motivate these actions; and
  4. The Fed’s actions might be a double-edged sword.

While you should go read the whole thing, the last consideration deserves emphasis:

The Fed probably sought to calm financial markets by moving before markets opened Monday morning, given last week’s extreme volatility. But the Fed’s aggressive actions also signaled that the financial system is more at risk than many realized. Fiscal and monetary authorities will probably have to provide more public support for the world economy.

That may be why markets fell precipitously after the Fed’s actions, prompting the South Korean finance ministry to pledge “swift and stern stabilization measures” then echoed by policymakers around the world. What’s more, several governments — including Australia, India, South Korea and the United Kingdom — suggested an emergency meeting of the Group of 20 governance group might be needed.

Parallels to the 2008 financial collapse abound. By once again deploying its crisis tool kit, Fed officials indicated that the pandemic could drive the global economy into a more severe shock than anything seen in more than a decade.

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