Bite-size Case Study

COVID-19 and the Federal Reserve

Published on March 30, 2023 Originally recorded 2023   4 min
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The story since the GFC has been one of crisis, of widening, of coming to terms with new and difficult realities and COVID and the reaction of the Federal Reserve is actually an extension of that pattern, and a reminder that these issues are likely to continue to persist into the future.
At the same time, as cities were going into lockdown in February and March, and emergency wards begin to fill up with patients, there was a parallel financial emergency unfolding. Once again, central banks and governments in March, there was a simultaneous collapse in stock prices and an increase in bond yields. What this meant was that instead of the traditional response during a crisis, which is for investors to shift their money from equities into bonds, investors across the world were selling everything in a desperate attempt to get their hands on cash, which was a similar pattern that occurred during the worst parts of the GFC. But as you can see on the right, the actual outflows of people pulling their money out of mutual funds was far worse during COVID than during the GFC.
On its surface, COVID's impact on financial markets looked at first like a rerun of the GFC and central banks were ready. In mid-March, the Federal Reserve announced a package of tools and policies very similar to what had been used during the GFC. In fact, it reactivated the series of old facilities that had been used during the GFC. However, unlike the GFC, this time, it didn't work. In a few days after the Fed's announcement, markets continued to panic and ended up descending into break down and again missed this pattern where central banks were forced to expand their role and their policy to combat the new crisis, and it wasn't till that expansion had taken place with the Fed's announcement that they'd be moving into corporate, municipal debt markets, that financial markets actually began to calm down towards the end of March, beginning of April.