Powell says Fed keeping its eyes on virus
The spread of the coronavirus rattled global financial markets Friday, sending U.S. stocks to their worst week since the financial crisis more than a decade ago.
Federal Reserve Chairman Jerome Powell, in an attempt to soothe jittery investors, issued a short statement Friday afternoon reaffirming that the central bank would use its tools and “act as appropriate to support the economy.”
While Powell said that the “fundamentals of the U.S. economy remain strong,” he noted that “the coronavirus poses evolving risks to economic activity” and that the Fed “is closely monitoring developments and their implications for the economic outlook.”
The statement came as stock markets in the U.S. tumbled for the seventh day as the continued spread of the coronavirus stoked fears that the world was on the cusp of a pandemic and, potentially, a recession. Expectations that the central bank will cut borrowing costs have skyrocketed as new coronavirus cases outside China continue to mount, and economists saw Powell’s state
ment as a signal that the Fed would act soon to offset any economic fallout.
“It was certainly an attempt to calm things down,” said Torsten Slok, an economist at Deutsche Bank. “This is the strongest hint you can make that a rate cut is coming.”
Coronavirus cases in South Korea, Japan and Italy are climbing fast, prompting factories to close and contributing to a steep falloff in tourism. While there have been comparatively few confirmed infections in the U.S., public health officials have warned that clusters of infection are very likely to appear, potentially resulting in quarantines and production slowdowns.
Stock market indexes have slumped on virus worries, and money has been pouring into U.S. government securities as people look for safe investments, pushing prices up and the yields on 10-year Treasuries to record lows.
President Donald Trump, who has played down the economic threat to the U.S. from the virus, said Friday that he hoped the Fed would step in soon and cut rates.
“I hope the Fed gets involved, and I hope it gets involved soon,” Trump told reporters at the White House before heading to a rally in South Carolina. The president has routinely criticized the Fed for not cutting rates more aggressively.
Investors have also begun looking to the Fed for an economic rescue. Markets have fully priced in a rate cut by the Fed’s meeting next month — something they saw as highly unlikely only a week ago. Economists at Bank of America wrote Friday that they now expected a 50-basis point cut next month. Rates are currently 1.5 percent to 1.75 percent.
“An emergency cut by the Fed prior to the meeting is possible — it will depend on the extent of market dysfunction,” they wrote.
The stock market trimmed its losses after Powell’s statement was released at 2:30 p.m. but remained in significantly negative territory.
“The statement is a step in the right direction, but it stops short of what is needed, which I think is a statement that says that the Fed can act pre-emptively to support the economy,” said Roberto Perli, an economist at Cornerstone Macro. “It’s missing a sense of timing.”
Powell’s colleagues have expressed concern about the coronavirus, but several have also signaled that they were not ready to lower interest rates. James Bullard, the president of the Federal Reserve Bank of St. Louis, said during a speech in Florida earlier Friday that “we could cut rates if we got a global pandemic that actually develops with health effects that seem to be approaching the same level as seasonal influenza, but that doesn’t look like the baseline as of today.”
Powell’s statement underlines that the most important member of the 17-person Federal Open Market Committee is closely focused on an unfolding public health concern.
Loretta Mester, president of the Federal Reserve Bank of Cleveland and a monetary policy voter this year, said Thursday that the Fed should keep its options open. Mester, who is generally cautious about such moves, initially opposed the Fed’s decision last year to lower borrowing costs three times.
“We always have to come in with open minds about what’s going on with the economy, and every day we’re getting new information, especially with something that’s fast-moving, like this,” Mester said when asked whether a cut next month was possible.
Explaining how she viewed the Fed’s calculus, Mester said officials should try to gauge whether there will be longer-lasting economic effects from the virus, such as a hit to consumer confidence and demand.
“If people are temporarily staying home, not traveling, not interacting and purchasing things, that could be a short-term hit,” she said. “Or it could develop into something broader — and that’s the kind of calculus you have to do when you’re thinking about monetary policy.”
Though Bullard said he was optimistic that the virus would be contained, he declined to rule out a Fed rate cut next month, or even before, should things worsen.
“I wouldn’t want to prejudge the March meeting,” he said. “Obviously the situation is very fluid, and we’re going to want to monitor events right up until the meeting.”
Asked if the Fed would consider an emergency cut before its next meeting, Bullard said he also did not “have a sense” of whether that was possible.