(Apr 9): In our 1Q2020 Macro Quarterly: The Next Decade in Asset Allocation, we discussed how the policy response to the next recession would create a new era for markets.

Writing it in December, we certainly did not think the timing of that recession would come so soon. But the policy reaction in a broad sense has come in line with our expectations. With rates near the effective lower bound across developed economies, the commonly used tools of monetary policy on their own would not be enough. We suggested elected officials would need to step up fiscal stimulus and that the lines would blur between where central bank policy ends and fiscal policy begins. In this Macro Monthly, we discuss the features of the US and global policy response to the Covid-19 recession, near-term implications and some thoughts about how the economy, policy and markets may look when the virus has largely run its course.

Covid-19 and the associated steps to contain its spread have caused what is likely to be the sharpest contraction in economic growth in history. In addition to causing tragic human and direct economic costs, the speed of the shock exposed underlying fragilities in financial markets. These included a banking system, partly due to constraints of post-crisis regulation, reluctant to intermediate the US Treasury Curve, the world’s liquid benchmark, discount rate and diversifier. The cost of dollar funding for both domestic and international users spiked, credit markets froze and volatility in major asset classes reached record highs.

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