This article was updated 19 March 2020.

  • The COVID-19 pandemic is disrupting the global economy.
  • The monetary policy tools available for crisis situations are dwindling.
  • Even if existing tools are deployed, their impact may be limited.

Earlier this week, the US Federal Reserve virtually erased what was left of its benchmark interest rate in a desperate bid to spare the world’s biggest economy from a deep, coronavirus-induced recession. It may not be enough.

Around the world, policymakers are grasping for levers that can be pulled to help economies muddle through a COVID-19 pandemic that has now arrived in more than 150 countries and territories. But more than a decade after a global financial crisis that showcased policy tools designed for such traumatic events, the toolbox is dwindling.

Cutting interest rates, a tried-and-true means of encouraging people to buy more things and take out bigger loans, can only last for so long. The European Central Bank and the Bank of Japan, for example, had already cut rates into negative territory before the pandemic – an extreme measure that can (at least theoretically) lead to paying a bank to hold your money.

Image: World Economic Forum

In some cases central banks have revived or amped up their emergency “quantitative easing” debt-buying programs – aimed at bolstering bond prices and containing interest rates. The European Central Bank, without much room to maneuver on interest rates, unveiled a new, €750 billion bond-buying program in response to COVID-19 on 18 March, after the US had announced a $700 billion program on a day when the number of confirmed cases in that country topped 3,000.

Spread of COVID-19 in the US.
Spread of COVID-19 in the US.
Image: World Economic Forum

Even if policymakers do manage to prompt people to keep pumping money into economies, it remains unclear whether that will be decisive. Fears about COVID-19’s fundamental impact on supply chains needed to get goods into stores run deep, and a lot of stock market volatility is now being automatically triggered by algorithms.

For more context, here are links to more reading, courtesy of the World Economic Forum’s Strategic Intelligence platform:

  • COVID-19 brought an 11-year bull market to an abrupt end. Now, the central bankers faced with the task of stepping in to avert another financial crisis must do so with balance sheets not yet fully recovered since the last one. (The Conversation)
  • Are independent central banks passé? Instead of bemoaning government efforts to wrest control away from them, central banks need to enhance transparency and get better at explaining and justifying their actions. (Project Syndicate)
  • A manifesto written by a group of economists in Portugal calls for extreme measures in response to COVID-19 in the European Union, including potentially amending EU law in order to enable more financial relief. (VoxEU)
  • The coronavirus calls for wartime economic thinking, according to this piece, in which a former chief US economist at HSBC argues that in addition to a coronavirus spending bill, the US will require a stimulus package worth as much as $2 trillion. (New Yorker)
  • Even in a place like Viet Nam that has done an admirable job of containing the spread of the coronavirus, its economic impact – potentially exacting a full percentage point of GDP growth – underlines the need for action from the central bank. (The Diplomat)
  • The European Union is trying to find the right formula for macroeconomic stabilization – but this author argues it’s hindered by an incomplete institutional framework with no centralized fiscal authority. (Peterson Institute for International Economics)
  • Despite the best efforts of federal lawmakers in the US, several critical areas of economic stabilization are likely to remain unaddressed in that country – which is where local governments should step in with their own economic aid, according to this piece. (Brookings)

On the Strategic Intelligence platform, you can find feeds of expert analysis related to COVID-19, Financial and Monetary Systems and hundreds of additional topics. You’ll need to register to view.

Image: World Economic Forum