And the award for saving the economy goes to ...
Of all the global awards handed out each year, one announced on March 25 was hardly noticed. Yet it should be. The trade publication Central Banking recognized the U.S. Federal Reserve as Central Bank of the Year. The main reason: In early April 2020, the Fed prevented widespread panic in world financial markets over fears of economic disaster from the pandemic.
鈥淭hat financial markets did not completely break down was primarily due to the actions of one central bank, the US Federal Reserve,鈥� the publication stated. 鈥淯nder the stewardship of its chairman, Jerome Powell, the Fed acted rapidly and boldly to avert a meltdown 鈥� not just in the US, but in markets across the world. The Fed pulled out all the stops in its efforts to shore up US dollar liquidity. And it did so extraordinarily quickly.鈥�
The Fed, for example, set up 鈥渟wap lines鈥� with more than a dozen other central banks to allow them to inject U.S. dollars into their economies. That and other innovative responses kept credit flowing and averted a 鈥渇inancial crisis that could have morphed into another Great Depression,鈥� Kristalina Georgieva, managing director of the International Monetary Fund (IMF), told the publication.
While much of the world was dealing with a fear of COVID-19, the Fed was dealing with another fear. Global output was declining, far more than during the 2008 financial crisis. In the United States, the rate of people participating in the labor market saw the biggest drop since World War II. A year later, financial stress from the pandemic 鈥渉as been largely avoided so far, owing to the unprecedented policy actions taken,鈥� according to a new IMF report.
Because financial stability has largely been preserved, the expected 鈥渟carring鈥� in the global economy is less than from the financial crisis 12 years ago, the report finds. In fact, the world has seen a few benefits. In the U.S., even though employment has more ground to regain,聽the number of new businesses reached a record high in the third quarter of 2020.
The Fed was hardly alone in taking action. The world鈥檚 three major central banks 鈥� in the U.S., Japan, and Europe 鈥� expanded their balance sheets by about $8 trillion in聽response聽to the聽pandemic. And they will continue to play a vital role in supporting聽economic recovery.
For his part, the Fed chief explained his actions a year ago this way: People did not cause the virus, and because they are making sacrifices for the common good, 鈥渨e need to make them whole.鈥� The IMF expects global growth to be 5.5% or even higher this year. That鈥檚 pretty good evidence of a lack of panic and a coming restoration of wholeness.
