Stocks, the virus, and the Fed

One thing is clear; stocks are reacting to both the virus and the Fed. Indeed, right now almost nothing else seems to matter. How can we understand this pattern?

The current value of the stock market is quite closely correlated with the expected value three years in the future. And the expected value of stocks three years in the future depends heavily on where investors currently believe NGDP will be three years in the future. That is, current monetary policy expectations are heavily influencing future expected stock values, which influence current stock values.

At the same time, the virus is obviously the primary force impacting the market in recent weeks, while monetary policy is a secondary factor. So how does that mesh with the previous claim that Fed policy is driving the market? The answer is provided in the Fed funds futures market, where rates have fallen to barely over 0.6% in early 2023. The market is afraid that the virus won’t just depress aggregate supply during this year; it will also (indirectly) depress aggregate demand for a number of years.  In other words, the market fears that the virus will cause the Fed to tighten policy, that is, raise the policy interest rate relative to the equilibrium interest rate.

Today’s mild bounce back was driven by expectations of central bank stimulus:

The S&P 500 jumped more than 3%, the most in a year, after news that Group of Seven finance ministers and central bankers will hold a teleconference Tuesday to discuss how to respond to the outbreak.

The hope is that this will prop up demand after the worst of the crisis is over:

“Markets are already looking beyond the first half, looking toward the second half to see whether or not we get a recovery in demand,” said Anik Sen, global head of equities at PineBridge Investments, which has about $101 billion in assets under management.

Tyler Cowen has another hypothesis:

So one way to think about Covid-19 is as a test of various systems around the world — political, medical and economic. Markets believe those systems are failing that test.

I suspect this is also a part of the story, but not the primary factor.

Over at Econlog I discuss how the coronavirus might impact the business cycle, and argue that the Fed probably could not and should not try to prevent a fall in NGDP growth this spring.

BTW, here is a new Macromusings podcast where David Beckworth interviews me on the role of monetary policy in an epidemic.



21 Responses to “Stocks, the virus, and the Fed”

  1. Gravatar of msgkings msgkings
    2. March 2020 at 14:22

    I posted this a couple threads back, isn’t it a bit of a concern that on a huge up day for stocks, UST rates plummeted again? If the market expected some Fed rate cuts wouldn’t the 2 year and higher rates have risen instead?

  2. Gravatar of Ray Lopez Ray Lopez
    2. March 2020 at 14:37

    Sumner in this post: “The current value of the stock market is quite closely correlated with the expected value three years in the future”

    Sumner in a post a few days ago: “Unless I’m mistaken, fed funds futures for January 2023 are down to about 0.7%, far lower than 10 days ago. Two things are very clear: 1. The coronavirus is the proximate cause of that decline … 2. The decline did not occur because markets fear that the coronavirus will prevent people from shopping in January 2023. ”

    How do we reconcile the two irreconcilable Sumners?

    “Do I contradict myself? Very well then I contradict myself” – Walt Whitman

    @msgkings – Wow, is your account hijacked? You *do* know that rates move in response to anticipated Fed action? So if the Fed is expected to raise rates, markets will anticipate this and move up? Conversely if the Fed is expected to cut rates, treasury yields move down? None of this has any real effect on the economy of course.

  3. Gravatar of ssumner ssumner
    2. March 2020 at 14:46

    msgkings, Yes, I agree.

  4. Gravatar of Benjamin Cole Benjamin Cole
    2. March 2020 at 15:48

    I think this post is correct. The stock markets do not anticipate a robust fiscal and monetary response to the supply and demand shocks of the coronavirus.

    Stanley Fischer says monetary authorities are out of policy space.

  5. Gravatar of Benjamin Cole Benjamin Cole
    2. March 2020 at 15:49

    I think this roughly right. Markets do not anticipate a robust response from fiscal and monetary authorities.

    Stanley Fischer says that monetary authorities are out of ammo and need to go to the helicopters. But his recommended solution, of a special fiscal-monetary authority, has not yet been implemented.

  6. Gravatar of Ricardo Ricardo
    2. March 2020 at 16:02

    Much speculation over whether and how much of the recent markets turmoil is corona-virus or caused by increased chances of a Pres. Bernie Sanders.

    “Bond king” Gundlach believes that a not insignificant portion is Bernie Sanders chances:

    Also saw a CNBC discussion by their usual pundits: some of them thought about 70% of the markets turmoil was corona vs. 30% of it Sanders. Which sounds about right to me.

  7. Gravatar of Mark Mark
    2. March 2020 at 18:19

    I think at least one other thing matters: the South Carolina primary, which significantly decreased the odds of a Sanders presidency. Today’s stock market bounce was concentrated in US stocks; most other stock markets were flat or only up a bit. If the main factor today were the virus or the Fed, one would have expected a more global bounce. The bounce being much bigger in the US than elsewhere suggests that US-specific factors are at play too.

  8. Gravatar of ssumner ssumner
    2. March 2020 at 19:23

    Ricardo, No, that’s probably not it. The chances of a Sanders presidency didn’t move much during the stock market crash.

    I’d guess the guy making this claim has an agenda.

  9. Gravatar of ssumner ssumner
    2. March 2020 at 19:25

    I’d add that the US stock market did very well when Sanders was surging to the top in the first half of February.

  10. Gravatar of Michael Sandifer Michael Sandifer
    2. March 2020 at 22:21


    I have a more complete reply on your related Econlog post, but will briefly say here that a real shock is no occasion to allow wages to rise versus NGDP. I don’t think the Fed can avoid some hit to employment, but why exacerbate by allowing real wages to rise?

  11. Gravatar of Benjamin Cole Benjamin Cole
    3. March 2020 at 01:47

    I will say it again. The time to avoid an auto accident is before it happens. The time to avoid a recession is before it happens.

    The Fed is like a fellow driving a car that has slipped on ice into the opposing lane, but does not want to rush on any corrective measures.

    Beyond that, what would be the harm in some aggressive monetary easing immediately? Suppose there is no recession, and the additional stimulus was unwarranted? What then? Inflation might migrate up to the target rate?

  12. Gravatar of Ricardo Ricardo
    3. March 2020 at 05:17

    It looks to me that Sanders chances of winning of the Democratic nomination are closely correlation with the recent market actions:

  13. Gravatar of rayward rayward
    3. March 2020 at 05:29

    If the coronavirus causes a significant supply shock (disruption of supply chains, etc.) while the Fed and Congress adopt policies intended to stimulate aggregate demand, won’t that create a mismatch (i.e., risk rising consumer prices)? On the other hand, we’ve been relying on rising asset prices and the wealth effect for years to stimulate aggregate demand: if asset prices decline, so will aggregate demand. Indeed, if investors come to view falling asset prices as evidence prices were excessive, doesn’t a decline in aggregate demand become self-fulfilling. There’s even an op/ed in the NYT today by William Cohan in which he asserts that investors are using the coronavirus as an excuse to cut and run.

  14. Gravatar of Michael Rulle Michael Rulle
    3. March 2020 at 08:41

    Well, they did a cut in real time—Powell is impressive—defying expectations (mine) that he is unable to adapt quickly

    Sanders has low impact now—but that will jump considerably as it becomes more clear he will get the nomination—also–for him to not get it–(538 claims 50-66% chance of brokered convention) the Dems will have to at least pretend to give him a lot of what he wants—in the almost-meaningless platform—which is not nothing.

    As we get closer to convention, and then the election—“gamma” will increase–figuratively and literally in political and financial markets—-and since we have “learned to not believe in polls” (that is actually a “hoax”—538 had Trump at 30% on election day) but the various averages is what all focused on—-there will be great uncertainty—-538 is the best right now—as good as “hypermind”? We will see.


    Your comment on 2023 Fed Funds—the forward curve goes to 75 in July and 60 in November–2020. And stays flat—to Feb 23 from there. Recognizing that interest rates are not monetary policy (because you sent me a concise definition of what it is) how can you infer among the “variables” i.e the difference between the policy rate and the un-observable “equilibrium rate—that the market is forecasting tightening. –

  15. Gravatar of ssumner ssumner
    3. March 2020 at 09:12

    Michael, I infer that those low rates reflect expectations of slow NGDP growth in 2022-23.

  16. Gravatar of Michael Rulle Michael Rulle
    3. March 2020 at 09:28

    PS—-Re: Ammunition

    Listened to Bloomberg News this morning on way to office. While they seemed to think the action by the Fed was a positive, they also said it is dangerous—“because they are running out of ammunition”—-almost as if rates are a savings account that the Fed is dipping into—and thus creating future risk. But they also simultaneously said, “they will have to do QE and other “unconventional” tactics” to counter act “running out of ammunition”. I don’t think they understood the irony of the statement.

  17. Gravatar of Steve Steve
    3. March 2020 at 09:34


    You said, “Over at Econlog I discuss how the coronavirus might impact the business cycle, and argue that the Fed probably could not and should not try to prevent a fall in NGDP growth this spring.”

    How about trying to prevent a fall in NGDP growth now and then if future NGDP rises above target, adjusting for that when needed?

  18. Gravatar of Michael Rulle Michael Rulle
    3. March 2020 at 09:39

    yes on NGDP 2022-23–thanks

  19. Gravatar of Ray Lopez Ray Lopez
    3. March 2020 at 09:43

    Ladies and gentlemen, note the irony of our host, a Trump hater, implicitly supporting Trump who in his Tweet today advocated the Fed ease even more. Politics make strange bedfellows (economics is largely politics).

  20. Gravatar of marcus agrippa marcus agrippa
    3. March 2020 at 16:22

    you ignored my last comment, probably for point 2.

    maybe you will listen to a “real” economist.

  21. Gravatar of ssumner ssumner
    4. March 2020 at 10:25

    Steve, I favor targeting one year forward NGDP. Hopefully that minimizes any near term decline, but there is no guarantee.

    Marcus, John Cochrane is great, but he needs to read a bit more market monetarism. His “second thought” is our first thought. We get the the essentials right away.

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