T. Rowe Price

March 2020 / INVESTMENT INSIGHTS

Strong Fiscal Response Needed After Fed Moves on Liquidity

Investors fear central banks have reached the limit of their influence.

Key Insights

  • Bold central bank actions have failed to prevent steep declines in equity markets and weakness in credit markets, indicating investor concern that not enough is being done.
  • Central banks have moved aggressively to address liquidity issues, but governments need to produce an effective fiscal response.
  • For stability to return, there needs to be clear evidence that countries that have taken Draconian measures are succeeding and that others are on the right path.

Aggressive global central bank moves to blunt the financial impact of the coronavirus outbreak have failed to reassure equity and credit markets, putting pressure on governments to come up with a more emphatic fiscal response to the crisis.

While the actions from the U.S. Federal Reserve (Fed) and other central banks were bold, they were not enough to offset the onslaught of bad news surrounding the outbreak, providing further evidence that there is a limit to what central banks can achieve alone. Proof that some countries are succeeding in tackling the coronavirus, providing a clear pathway to those behind the curve, likely will be needed for stability to return to the markets. In the meantime, while negative U.S. policy rates remain unlikely, it is possible that Treasury yields may fall below zero if investor demand for safe‑haven assets remains strong.

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