US central bank won't shift rates but virus adds new risk factor

The Federal Reserve is widely expected to leave its key interest rate unchanged on Wednesday.

The US economy is on a steady though tepid growth path, but the outbreak of the novel coronavirus that has spread to other countries has fueled concerns it could slow growth and the effects will spill over to the global economy. Businesses, including more than half of all Starbucks and a Disney theme park have been shuttered, travel has been restricted, and major airlines have cancelled flights as authorities in Beijing try to contain the illness that has sickened thousands and killed more than 100 people.

The Fed's policy-setting Federal Open Market Committee (FOMC) will wrap up the second day of deliberations at 1900 GMT Wednesday and likely will repeat recent statements saying it will keep watch on "global developments."

Fed Chairman Jerome Powell is likely to face questions about the virus in his customary press conference following the policy decision and likely will say that central bankers are keeping a watch for economic contagion from the ailment. Economist Joel Naroff said the virus could become a factor in policy if it hits financial markets "and if there are clear signs it will slow the economy."

"Powell seems to worry more about the markets than anything else even if he never says that," Naroff told AFP by email, noting the Fed's decision to stop raising interest rates at the end of 2018 "even though the economy continued on its merry way." The Fed cut the policy rate three times in 2019 amid signs the US and global economies were facing headwinds-in part due to President Donald Trump's multi-pronged trade war that undercut growth.

"That could happen again, but he has no cushion this time as he ate up 75 bps (basis points) with the last set of easing," Naroff said of Powell. The Fed chief has signaled that the central bank is only likely to move if there is a "material" change to the economic outlook.

"That bar has not been met," said Ian Shepherdson of Pantheon Macroeconomics. "Even manufacturing, which is the weakest part of the economy, is merely stagnating rather than rolling over," he said in a preview of the Fed decision. A trade truce between Washington and Beijing signed earlier this month had boosted stock markets worldwide amid hopes it would provide stability for businesses, but most of the punitive tariffs remain in place.

The virus undermined the recent stock markets gains, although Wall Street rebounded on Tuesday. Boeing, which remains mired in crisis following two fatal crashes of its top-selling 737 MAX, is set to report another ugly set of financial results on Wednesday.

The aerospace giant, led by newlyinstalled Chief Executive David Calhoun, is expected to announce billions of dollars in additional costs connected to the MAX grounding.

The plane has been out of service since March after the second of two crashes that killed 346 people. Boeing suspended production on the plane earlier this month. A hefty charge could push annual results into the red for the first time in more than two decades, capping a disastrous year in which Boeing already lost its crown as the world's biggest plane maker.

Still, much of the bad news is already baked into the stock. Shares have fallen more than 20 percent over the last 10 and a half months as the grounding has dragged on, prompting downgrades from credit agencies S&P and Moody's.

With its stock so beaten down "there could at some point be a tactical trading opportunity" when the plane is cleared to fly again, Credit Suisse said in a note earlier this month. Until then, "we see numerous risks that impact the long-term investment thesis and therefore our ability to become constructive," Credit Suisse added.

In a positive development, a Federal Aviation Administration (FAA) spokesman said Friday that the agency was "pleased" with Boeing's progress in meeting MAX milestones, but the agency still has no timetable to return the jet to service.