What really happened in March 2020?
How did the Federal Reserve avoid an economic crisis and the consequences of it?
March 2020… What a month…
The market is crashing, the virus is spreading… I mean what more could you wish for, you little anarchist.
But here is some bad news for my little anarchist. Despite the closing of the economy, somehow there was no economic crisis, at least not a big one like in 2008. Why?
Well, there is this semi-god called Jerome Powell that, with his super-powers, pushed the stock market to all time highs.
As many of you know, Jerome Powell is the chairman of the Federal Reserve and has a great influence over the policies that are designed to help the economy.
But before diving into all of this, let’s go one step back.
The virus is spreading. Investors are scared as they never dealt with something similar before. So what do they do? They want to protect their hard-worked money from the market’s volatility. They want risk free assets, safe-havens for their money.
So how did they proceed?
First, investors fled the stock market. Why? Because staying in the market involved risk, a risk they were not ready to take. This was a wise decision as the stock market plummeted.
Now, where did the money go? Well, money went into bonds(which are considered less risky) and safe havens like the US Dollar and Japanese Yen.
Here is a summary of what happened:
Money out of stocks → stocks plummeted
Money into bonds → yields went lower, indicating a weak and scared economy
Money into safe havens → Dollar and Yen rose
With the dollar rising, people tended to hold cash as it gained value, therefore adding more deflationary pressures in an already deflated economy.
In order to avoid the market’s collapse, The Federal Reserve had to find a way to make people give up on cash and start spending and pouring money into the markets again.
So, how did they do it?
Well, simple. They turned on the MONEY PRINTERS. They basically created more money and injected it into the economy.
By printing money, they increased the money supply, causing the dollar to lose its value. Now holding cash doesn’t sound so good, right?
The newly printed money were injected into the economy::
By buying bonds, which made the yield go even lower, therefore making the bonds a not-so-rewardy investment
By buying stock ETFs, The Federal Reserve was able to lift the markets from the bottom
By sending stimulus checks,which encouraged people to spend
All of these policies were designed to sustain the economy even when it was closed.
Also, there is another measure that was taken by the Federal Reserve, maybe the most important one: cutting interest rates. By doing so, they encouraged companies to expand.
Now, there is a lot of debate about whether or not inflation is coming and when will be the first rate hike and when will the Quantitative Easing end and so on and so forth. These questions will be addressed in further articles.
For now, one must know exactly how we got in this current position before making predictions about the future.
Hope you enjoyed reading and stay tuned for further investment articles.