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The Fed did what it could, but it still can’t stop the financial panic

The economic collapse now spreading as fast as the coronavirus requires credit channels to be kept open, but it needs precious funding to flow through them even more.


Jerome Powell, chair of the Federal Reserve

For credit markets to operate, they need a functioning rates market beneath them. That is why the US Federal Reserve’s 100 basis point rate cut on Sunday night and its reopening of quantitative easing (QE) with the announcement of a $700 billion programme was both essential and yet also insufficient to stem financial market capitulation.

In a financial emergency, repairing channels for the flow of credit is the first priority. The destruction of paper wealth in equity markets will continue for now – albeit with upward spasms that traders will try to capture – spreading pain to long-term investors. This will not end until we can see with some certainty the likely full extent of the Covid-19 virus and its economic impact.

Right now, that’s impossible.

It is fine to propose sick pay and a mortgage holiday – but what about those businesses and households which depended on earning rent? - Matt King, Citi

There have been plenty of comparisons of the current sell-off in equities with, for example, the great financial crisis of 2007 and 2008, when US stock markets fell by 57%, and with the 1929 crash and Great Depression, when they fell by 86%.

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