In recent days the major global central banks have been attempting to take action against the effects of the spread of the coronavirus, which is currently disrupting the day-to-day life of the different countries and bringing down the economic performance of several global and local industries as well as disrupting the global supply chains.
Nevertheless, the financial markets didn't react in a positive way to those measures, putting into doubt the effectiveness of monetary policy in times of crisis.
The Federal Reserve announced its decision to bring down the cash rates near to zero on Sunday, followed by the actions of other major central banks, including the ECB and the Bank of Japan on Monday. In a joint action, the Federal Reserve and various global central banks agreed to inject liquidity into the markets while some of them also decided to cut their cash rates (that's the case of the reserve bank of New Zealand) and to ease its monetary policy stances.
Despite the moves, the major reference indexes remained in bear territory as the S&P 500 fell by 11.98 percent followed by the Dow Jones industrial average, which lost 12.93 percent on Monday. In Europe, the FTSE 100 and the Dax went down by 4.01 percent and 5.31 percent respectively, followed by the major Asian benchmark indexes, as the Nikkei 225 and the Shanghai Composite slumped by 2.46 percent and 3.40 percent respectively.
Despite the disappointing figures, the Federal Reserve announced further liquidity injections on Tuesday, followed by a rebound of the main American benchmark indexes. The S&P 500 closed on the positive territory on Tuesday, adding 6 percent while the Dow Jones industrial average gained 5.42 percent. European indexes also rebounded, following a pledge from G7 leadership to do “whatever is necessary” to fight the epidemic, as the FTSE 100 added 2.79 percent while the Dax gained 2.25 percent. Asian indexes didn't perform as well, as the nikkei only added 0.06 percent during the session while the Shangai composite index went down by 0.34 percent.
The main question now is whether central banks still have room to maneuver in the face of the devastating economic effects of the outbreak, especially as the virus keeps spreading around the world and it's still not clear when the global distress will subdue. At the moment, there are more than 199,000 reported cases, as well as almost 8,000 deaths. Countries like Italy and Spain are currently struggling with a dramatic increase in diagnosed cases and deaths, while it seems that the United States is heading towards a similar situation.
One thing is clear: the continuous calls for government fiscal support and volatility is gripping the global markets. However, the fact that the problem didn't originate in the financial markets put into question the extreme reliance on aggressive monetary policy actions.
“Given the nature of the uncertainties, given the nature of the collapsing incomes of so many people, it can help stabilize financial markets at best and it’s clear that it didn’t do that,” economic Nobel laureate Joseph Stiglitz told CNBC.
Chances are that we're already entering into a global recession, however, it's still too early to confirm this fear.