Economic Realities and Consequences of the COVID-19 Pandemic—Part I: Financial Markets and Monetary Policy

Federal Reserve Bank of St. Louis | research.stlouisfed.org Expected near-term stock volatility, as measured by the VIX index, has also increased to historic highs. We have witnessed days of sharp declines but also of big recoveries, and the stock market has been very sensitive to policy news (Figure 2). The stock market has partially recovered since March 23, recovering about 14 percent by March 27, based on news about Fed intervention and a deal on a fiscal stimulus package. The aftermath of the previous financial crisis witnessed increased financial regulation and oversight. Regulators now subject banks, bank-holding companies, and systemically important financial institutions to closer monitoring and supervision. The financial sector has moved toward more liquid and safe assets; in particular, asset holdings have shifted from loans to Treasuries, government-backed securities, and corporate equities. However, this consolidated view masks the risks present in some parts of the system. 2020 n Number 10