Will they or won’t they? The risk of betting on the Fed

THE world economy stared into the abyss on Mar 16, 2020. Covid-19 had sent country after country into lockdown, disrupting manufacturing supply chains and service sectors. Global US dollar liquidity had dried up, and recession risks were soaring. In Europe, credit default swaps on corporates traded with a default probability of around 38 per cent. As confirmed Covid-19 cases soared from fewer than 10 in January to nearly 165,000, scientists speculated desperately on fatality and transmission rates.

Market participants, meanwhile, were on tenterhooks. As sentiment morphed from concern to panic, the crash began. The Dow Jones ended the day down nearly 3,000 points. The S&P 500 dropped 12 per cent, and the Nasdaq fell 12.3 per cent. It was the worst day for US equity markets since Black Monday in 1987.

Reprising its global financial crisis (GFC) playbook, the US Federal Reserve sought to calm the markets and extended immediate liquidity to prevent a pandemic-induced cross-market domino effect. Before the market opened on Mar 16, 2020, the Fed agreed to swap-line arrangements with five other central banks in an effort to ease the strain on the global credit supply. A few days later, the Fed entered similar agreements with nine other central banks.