Question

How do you expect and analyze the impact of the pandemic on the financial markets (including the foreign exchange market) and the U.S. economy.

Answer 1

As long as there is a widespread outbreak and rapid transmission, economic activity will be curtailed. The economic activity in the US were not being shut down in support of social distancing, the current spread of COVID-19 panedemic in the world reduces demand in the world economy and complicates supply chain, and the drop in equity prices lowers household wealth to an extent that would have caused a sizable slowdown in the US economy. When those factors are added to the ecnomic disruption needed to fight the virus, the US will likely see one of the sharpest economic contractions in its history this, March, continuing through the second quarter of 2020.

The core problem the economy faces is not a lack liquidity, but a temporary halt of activity due to health restrictions and a fundamental question of solvency for many firms and individuals. Thus, the activities of the Federal Reserve are important, but unlikely to be sufficient.  In many economic slowdowns, the federal reserve is the front line of defense. In this case, it has already lowered interest rates to zero and begun sizable purchases of assets along with injections of liquidity into financial markets.The shutting of business and limits on travel will cause economic activity to cotract regardless of policy. About fiscal policy, the primary goal of fiscal policy at present should be to cushion the downward shock as much as possible and set the conditions for the economy to bounce back after the restrictions on economic activity are removed. Over time, the emphasis if fiscal policy should shift toward increasing spending and resources in the econoy to restart economic activity. A substantial support for states from the federal government can alleviate budgetary pressures from increased spending on public health, unemployment, as well as reductions in consumption-based revenue. The safety net in the US is one of the most important fiscal automatic stabilizers we have. As economic conditions deterirate, a pending rises on Unemployment Insurance[UI] and SNAP[formerly food stamp program], pushing billions of dollars into the economy.

The dollar stood tall as investers scrambled for the world's most liquid currency amid deepening panic about the corona virus. The greenback held gains against most currencies after blowout in swap spreads showed investors are facing a shortage of dollars as equity market plunged on fears about economic impact of the virus. Currently the US economy will suffer very much but in long run economy will regain to normal.