After a wild week of central bank decisions across the globe, it’s important to take a step back and look at what we’ve seen the last few days in context.
The continuing COVID-19 pandemic is what we’d typically call a “black swan event,” or a hard-to-predict and exceedingly rare economic event outside the realm of traditional expectations.
Usually, after events like these, the world grapples with the impact and charts a return to normal economic patterns. So here’s the catch with the pandemic: the effects of this black swan event are still reverberating globally and causing new crises and crunches – we’re still in this one.
Take a look at what happened this week. Typically if one central bank raises interest rates by more than another, the former’s currency will gain as it’s seen as a better investment. However, we saw the opposite when looking at the Dollar versus the Euro this week.
First, the Federal Reserve raised interest rates 25 basis points, and the Dollar weakened; the next day, the European Central Bank enacted a 50-point hike, and the Euro fell by more than half a percent. These moves are inverse to what we usually see in response to central bank decisions.
Currency moves this week clearly show us that despite attempts globally to “move on” from the pandemic, we are still very much in the middle of this black swan event. Classical economic thought has been turned on its head over the last two years, and policy moves have often had the opposite effect they would usually have outside of this context.
The crises of 2020-2021 are clearly far from over on a global scale, so fiscal and monetary actors everywhere have had to think outside the box, in a sense, when enacting policy. We’re still a ways off from a return to baseline in policy-making.