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The Federal Reserve has taken the extraordinary step of slashing interest rates a full percentage point, restarting quantitative easing, and announcing a host of additional liquidity and credit easing measures.

After these measures, the Fed’s monetary ammunition is all but spent; all that is left is expanding QE, negative rates, or the nuclear option of direct currency intervention.

Neither of these options are appealing: the best hope for the global economy now are fiscal and public health policy.

The prompt timing and sheer scale of the Fed’s measures makes it clear that the central bank, like many others globally, is viewing the virus shock as the most serious threat conceivable to both the real economy and financial system. This is not a trade war or a bad quarter of growth but an unprecedented threat to the global economy and financial system.

The last time these measures of this scope were implemented was in 2008 after the financial crisis, but back then they were introduced over the course of months, not all in one night just prior to Asian markets opening. These are the actions of a central bank that believes it must act quickly and decisively facing a crisis of historic proportions.

The reason the dollar has not shrugged in response to this historic easing measures from the Fed is simple: global financial markets are firmly in a crisis dynamic, and monetary measures from the Fed can at best only slightly dent demand for the greenback.

After today’s measures from the Fed, global central banks are at the absolute limit of their ability to mitigate the impact of the virus on the real economy. The ECB, for instance, all but conceded defeat and begged for fiscal assistance at last week’s press conference. Some smaller central banks will be able to begin asset purchases as the shock worsens, and the Fed could expand QE or commence open ended purchases. But these measures may pale in comparison to the sheer unprecedented scale and duration of the virus threat.

 

EURUSD chart

Source: Bloomberg Finance L.P.
GBPUSD Chart

Source: Bloomberg Finance L.P.

 

Author: Ranko Berich, Head of Market Analysis at Monex Europe.

 

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