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Fight against global recession reaches new level of urgency

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Fight against global recession reaches new level of urgency

The fight against a global recession has reached a new level of urgency, but not so much so that a couple of key fighters feel compelled to extend their tours of duty.

Mark Carney, the Bank of England Governor, ended his seven-year tenure on Threadneedle Street as planned on March 13, even as COVID-19 continued its spread throughout Europe and North America. And Stephen Poloz, who replaced Carney as governor of the Bank of Canada in 2013, told a press conference in Ottawa that the coronavirus crisis hadn’t caused him to rethink his intention to retire when his term ends in early June.

“We are a team at the Bank of Canada,” Poloz said. “We have an excellent team. I have confidence in that team. So I do not intend to delay my retirement date, no.”

Both are going out in a blaze of glory.

The Fed’s measures reinforce the fact that the coronavirus’s threat to the global economy is potentially of unprecedented magnitude

Don Curren, market strategist at Cambridge Global Payments

At the 11th hour before markets began opening in Asia on March 16, the Bank of England and the Bank of Canada joined their counterparts from the United States, Japan, the euro zone and Switzerland in a joint operation to ensure each has ready access to U.S. dollars.

That move continued a shock-and-awe campaign by legacy powers that started early last week with the Bank of England’s surprise interest-rate cut on March 10. The European Central Bank injected more stimulus on March 12, Germany on March 13 said it would provide its companies an “unlimited” supply of bridge funding, and the Bank of Canada followed hours later with an unscheduled interest-rate cut of half a percentage point that dropped the benchmark rate to 0.75 per cent.

Then at 5 p.m. Washington time on March 15, the Americans dropped the motherlode: The Federal Reserve slashed its policy interest rate by a full percentage point, dropping it to zero, and said it would purchase at least US$700 billion of bonds and mortgage-backed securities to put even more downward pressure on commercial and retail borrowing costs.

“The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook,” the Fed’s policy committee said in a statement. Nine of 10 members voted in favour of the extraordinary rate cut. Chair Jerome Powell told reporters on a conference call that economic output in the second quarter “probably will be down a bit,” but refused to speculate beyond that. “We just don’t know,” he said. “The economic outlook is evolving on a daily basis.”

The rolling announcements — most of them unscheduled and featuring bigger-than-usual incremental changes to achieve maximum effect — make up for the letdown that followed the conference call on March 3 held by the Group of Seven finance ministers and central bankers.

Investors were anticipating a joint stimulus announcement by an assembly of the most of the world’s richest countries. All they got were promises, prompting a sharp drop in equity prices when markets opened in North America. The Fed watched this unfold for less than half an hour before cutting interest rates. Policy-makers around the world have been fighting historic volatility in financial markets ever since.

We are going through the eye of a needle and the market should start to stabilize somewhat in over a week or so

Sebastien Galy, a strategist at Nordea Asset Management

“As the disease spreads in the U.S. and we move to regionalized lockdowns, with restaurant activity already plummeted and followed soon by housing, we would expect the regime of high volatility to remain,” Sebastien Galy, a strategist at Nordea Asset Management, advised his clients after the Fed announcement. “Having said this, we are going through the eye of a needle and the market should start to stabilize somewhat in over a week or so.”

The Fed’s policy committee was scheduled to hold a two-day meeting starting March 17, but decided late last week to advance its deliberations. A second shock announcement in less than two weeks only fed the market’s panic and futures trading in New York plummeted on the news. Markets were immediately halted when they opened on March 16 as circuit breakers kicked in to halt trading. Many analysts were predicting the Fed would cut a full point, but over the course of many months, not all at once.

“The Fed’s measures reinforce the fact that the coronavirus’s threat to the global economy is potentially of unprecedented magnitude and that central banks and governments are willing to take unprecedented steps to address it,” said Don Curren, a Toronto-based market strategist at Cambridge Global Payments.

Central banks, definitely. The response of governments has been inconsistent, however, and probably a source of instability.

Carney acted in concert with Boris Johnson’s government, which pledged to boost spending by 30 billion pounds hours after the Bank of England’s interest-rate cut. Others have been hesitant. Bill Morneau, Canada’s finance minister, summoned Poloz and Jeremy Rudin, the country’s top banking regulatory, for a public show of force on March 13. But only Poloz and Rudin came with significant announcements. Morneau promised he would exploit the government of Canada’s significant “fiscal capacity” this week.

The leaders of the G7 — the U.S., Japan, Germany, France, the U.K., Italy and Canada — were scheduled to hold a conference call on March 16. There was reason to doubt anything would come of it, as Bloomberg News reported that Donald Trump, the U.S. president and current chair of the group, had to be nudged by European leaders to hold an emergency meeting. The larger G20, which assembled to fight the financial crisis in 2008, is nowhere to be seen this time around, perhaps because the current G20 chair, Saudi Arabia, has made the crisis worse by starting an oil-price war with Russia, which is also a G20 member, as are all the G7 countries.

Central banks are less constrained by geopolitics. But their relative freedom to operate might not mean as much as some people think. Powell said on the conference call that “we think we have plenty of power in our tools,” but that the Fed was skeptical about negative interest rates, which have been tried in Europe and Japan. Poloz made similar comments. “I don’t think I’m alone among central bankers who like the idea that much,” he said. “It’s not a happy place for the banking system.”

Both Powell and Poloz stressed that while they could stabilize their respective economies, the politicians are the ones with the power to reverse the recession. Carney and Poloz needn’t postpone their retirements because they’ve already done all that they can.

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