Economic and Market Commentary

Rapid Stimulus Response: The Result of Lessons Learned

Monetary and fiscal policy response has moved with unprecedented speed and scope and with implicit and explicit coordination for two distinct reasons.

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Tina Adatia, Fixed Income Strategist: You talked about this U-shaped curve, and right now we're of course in sort of the severe near-term pain and deep losses as we fall on this I trajectory. But one bright spot that we've seen so far is the rapid and significant policy response that we're seeing both from the monetary and the fiscal side. So what has been different this time in the way that governments have stepped up compared to past recessions? And do you think they will work to support the economy through this crisis?

Joachim Fels, Global Economic Advisor: I think what's different is that the policy response, both fiscal and monetary, has been fast and furious. So policy, or put differently, policies moving with unprecedented speed and scope. There are basically two reasons for this. First of all, if you look at what central banks did, they had the playbook available from the last crisis.

Chart: The chart is a side-by-side comparison of central bank policy rates from 2006 to 2020 and asset purchases for February, March and April 2020. The policy rates are depicted as line graphs: EM central banks moving from higher to lower with several peaks and troughs and DM central banks also moving from high to low and with a steadier low and a rapid drop at the end of the period. The asset purchases are represented by bar graphs: Treasuries and agency MBS are at a low steady rate for February to mid-March and then an increase for both mid-March to April, but more for agency MBS.

They introduced all of these measures in 2008/2009 and they could just turn the switch now and bring them on again.

Chart: The bar chart depicts asset purchases for Treasuries and agency MBS from February 2020 to April 2020. The mostly first have of the time period shows modest purchases for both; starting in March, a dramatic uptick for both occurs, and more so for agency MBS.

So large scale asset purchases, various forms of credit easing, multiple funding for lending programs, and so on. Basically, as I said before, they just had to turn the switch. 

The second reason why the response has been faster is on the government side. So for governments, it was easier to move fast because the recession didn't come as a surprise. They caused it in a way by imposing the containment measures. And I think governments knew what they were doing, that these containment measures would lead to a falloff, a rapid falloff in economic activity. So almost immediately, they got to work to cushion the blow for households and firms. So that's why the response is different. It's larger and it's also faster.

Chart: The double line graph depicts GDP weighted average policy rate (%) for DM central banks and EM central banks from 2006 to 2020. Both lines start from a high level, decrease in 2009, stay steady and low (with minor peaks and troughs for EM) and then a dramatic fall in 2020 following a slight increase.

And then looking at central banks, central banks are really helping governments to do what's necessary by cutting interest rates, by buying large amounts of government bonds as we can see on this slide.

Chart: The chart is a side-by-side comparison of central bank policy rates from 2006 to 2020 and asset purchases for February, March and April 2020. The policy rates are depicted as line graphs: EM central banks moving from higher to lower with several peaks and troughs and DM central banks also moving from high to low and with a steadier low and a rapid drop at the end of the period highlighted. The asset purchases are represented by bar graphs: Treasuries and agency MBS are at a low steady rate for February to mid-March and then an increase for both mid-March to April, but more for agency MBS.

So central banks stepped up not only as lenders of last resort for banks and other financial institutions, but they also stepped up as lenders of last resort for governments. And what we are seeing now in this crisis is a much closer implicit, and in some cases even explicit, coordination and cooperation between the monetary and the fiscal authorities.

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CMR2020-0415-1153650

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