March 10, 2020

Chart of the Week: Financial markets reel as coronavirus spreads

by Fathom Consulting.

Financial markets have been left reeling as COVID-19 continues to spread around the world. In the US, the Federal Reserve has already responded by cutting rates sooner than many expected. There remains some debate within the economics community as to whether the shock is predominantly a shock to aggregate demand or to aggregate supply — with different policy prescriptions flowing from each interpretation. If the shock is interpreted as being purely a supply-side phenomenon, with quarantines affecting people’s ability to work, then arguably the Fed should avoid cutting rates further. If, on the other hand, fear of the disease causes a fall in confidence, an increase in precautionary saving, and a decline in consumption, then macroeconomic policy should be looser than it is now. For the moment, investors clearly believe that the Fed will cut again — at the time of writing, ten-year US government bond yields had dipped below 0.5% for the first time.

 

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