Central Banks Struggle to Stop Market Rout

Author: Corey McDowell - Economics Editor

Published: 16 Mar 2020

Last Updated: 16 Mar 2020

Turmoil on Wall Street continues despite interventions by the United States Federal Reserve, with trading temporarily suspended again in the S&P 500. Stock markets in America suffered losses on the same level as Black Friday in 1987, with the S&P 500 index and Dow Jones industrial average both shedding around 10% again on top of previous losses. Throughout the world, over $18 trillion has been wiped off global shares. 

Big Promises 

To combat the panic, the Fed had promised to pump over $1.5 trillion into financial markets, though three $500 billion loans, in order to restore calm. The New York Fed will also increase the size of its lending the repurchase agreement (repo) market. $272.8 billion was submitted on Thursday, of which $198.1 billion was accepted. This is the third time in four days that limits have increased in the repo market. 

Liquidity Crisis 

This is fast becoming a liquidity crisis. Central Banks have convened emergency meetings and cut interest rates to new record lows. On Sunday, the Fed cut its base interest rate range to just 0-0.25% and formally launched a new range of money creation measures (quantitative easing). Other central banks in Europe, Britain, Switzerland and Japan have all followed similar plans of action. However, investors have been unconvinced . The sell-off of equities continues unabated; the FTSE 100 fell over 7% this morning again, while markets in Asia closed sharply lower.  

No Ammunition? 

Credit - tradingeconomics.com, US Fed

Credit  tradingeconomics.com, Bank of England

Will these measures actually make a difference? So far, the reactions from global markets seems to suggest not. Suddenly, the suggestion that central banks are running out of ammunition seems to ring true, especially with the enormous “reverse ferret” that they have been engaged with now.  

With banks hoarding cash, repo limits being reset on a daily basis and people staying at home, it is clear that liquidity is gone. So, these rate cuts won’t help with lending or spending – the more cynical analysts suggest it is just cheap headline grabbing. But it will help facilitate fiscal policy and enormous bailouts of businesses, airlines, cruise companies, banks, and so forth, many of which are too big to fail. The question which remains now is, are these companies now too big to save? 

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