COVID-19: Fiscal and monetary policy implications

The Coronavirus of 2019, also known as COVID-19 has swept across the globle originating from Wuhan in the chinese province of Hubei since late January.

Global stocks have experienced unprecedented volatility, comparable to levels since the financial crisis of 2008 as well as Black Monday of 1987.


Global indices have tumbled year-to-date.

In light of this tremendous market volatility, the FED made an emergency rate cut on the 3th of March, slashing interest rates from the range of 1.5-1.75 to 1.0-1.25, a full 50 basis point cut.

In an emergency move, U.S. Federal Reserve cuts interest rates to battle coronavirus

However, that wasn't enough and markets continued to drop precipitously the following days. Eventually governments around the world decided to put in coordinated monetary fiscal stimulus, with several governments of the G7 evoking national emergencies in order to provide ample liquidity to soothen capricious markets.

At the time of writing, the U.S. was the last country that evoked emergency status and Spain imposed a nationwide lockdown.

Trump declares coronavirus national emergency, says he will most likely be tested

Spain to impose nationwide lockdown - draft

The E.U. is even considering suspending fiscal rules in order to provide more fiscal stimulus to battered economies.

Ready to suspend fiscal rules amid virus crisis - EU's Dombrovskis

During the course of the next week, markets are expecting the Federal Reserve to slash interest rates even further at the FOMC meeting on the 18th of March. 

Current implied probabilities for various rate-cuts can be viewed below;

Markets are expecting 100% rate cut, with different probabilities on wether it will be in the 0-0.25% range or 0.5-0.75% range. We expect heavy market selloff if the FED does not lower interest rates to the 0-0.25% range as expectations will be crushed.

If rates are lowered to the current consensus, then we expect a reduction in volatility levels moving forward. 

It is important to note though that monetary policy and fiscal policy are potentially inefficient tools in the current market environment as we're experiencing a shock at both the supply-side and the demand-side with continuing restrictions and quarantines being rolled out at national levels across the world, leading to reduced consumer spending and potential layoffs.

Currently airlines are laying of a significant amount of the workforce due to the travel restrictions imposed by countries globally, whilst others are offering paycuts.

Norwegian Air to cut 4,000 extra flights and lay off half its staff

Airline SAS asks employees to take a 20% pay

In the midst of the doom-and-gloom, there seems to be hope at the end of the tunnel, according to Chinese medical advisers, stating that the Coronavirus could end by summer if proper preemptive measures are taken, coupled with the fact that the virus is sensitive against warmer temperatures.

Coronavirus pandemic "could be over by June" if countries act, says Chinese adviser

Currently we suggest clients to keep a close-eye on the Federal Reserve policy decision on Wednesday and monitor actions of governments.