Fed chair sees China virus as possible risk to world economy
WASHINGTON — Just as the outlook for the global economy had been brightening in recent months, a new threat has suddenly emerged in the form of the viral outbreak in China.
That was the cautionary message that Chairman Jerome Powell delivered Wednesday after the Federal Reserve held interest rates low after its latest policy meeting.
Speaking at a news conference, Powell said the signing of a preliminary U.S.-China trade deal earlier this month, the resolution of Brexit and continuing low interest rates in the United States and abroad had suggested that the world economy would start to expand more quickly after being held back by trade conflicts. That scenario is now complicated by the emergence of the virus.
Still, Powell noted that the extent of the economic damage that the virus may ultimately inflict, in China or around the world, remains unknown.
“There is likely to be some disruption to activity in China and globally,” Powell said. “It’s very uncertain how far it will spread and what the [economic] effects will be in China, for its trading partners, and around the world…. We are very carefully monitoring the situation.”
Even so, Powell said he thinks “there are signs and reasons to expect” a global economic rebound. And he said the initial U.S.-China trade agreement and a new trade pact among the U.S., Canada and Mexico that President Donald Trump signed into law Wednesday could potentially boost the U.S. economy.
Powell spoke after the Fed had announced that it has kept its key interest rate unchanged in a low range of 1.5% to 1.75%, far below levels that were typical during previous expansions. The chairman and other Fed officials have indicated that they see that range as low enough to support faster growth and hiring.
Investors, however, are increasingly betting that the Fed will feel compelled to cut rates later this year, likely out of concern that the U.S. will feel the impact of a global slowdown stemming from the coronavirus. The chances of a cut by September’s Fed meeting have risen above 70%, according to the Chicago
Mercantile Exchange’s FedWatch tool, up from roughly 40% just a month ago.
Still, Paul Ashworth, chief U.S. economist at Capital Economics, said he saw nothing in the Fed’s statement or at Powell’s news conference to make him change his belief that the central bank will keep its benchmark rate unchanged for the foreseeable future.
“Unless the U.S. experiences its own epidemic, we doubt that the indirect effects from the disruptions in China would be enough to warrant a U.S. rate cut,” Ashworth said.
The coronavirus has in effect shut down much of that nation and seems sure to slow the Chinese economy — the world’s second-largest — which had already been decelerating. The virus has now infected more people in China than were sickened in the country by the SARS outbreak in 2002-2003.
Major companies across the world have responded to the virus by suspending some operations in China. Starbucks said it plans to close half its stores in China, its second-largest market. British Airways has halted all flights to China.