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Fed Chair Issues Statement, Keeping Cut On Table as Virus Risks Roil Markets In Rare Statement, Fed Chair Keeps Rate Cut on Table as Virus Risks Roil Markets
(about 3 hours later)
Federal Reserve Chair Jerome H. Powell, in an attempt to soothe jittery investors, issued a short statement Friday afternoon reaffirming that the central bank will use its tools and “act as appropriate to support the economy.” The Federal Reserve chair, Jerome H. 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 the Fed Chair said that the “fundamentals of the U.S. economy remain strong,” he also noted that “the coronavirus poses evolving risks to economic activity” and said that the Fed “is closely monitoring developments and their implications for the economic outlook.” While Mr. Powell said that the “fundamentals of the U.S. economy remain strong,” he also 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.”
Mr. Powell’s statement came after his fellow officials signaled a willingness to cut interest rates if the coronavirus outbreak worsens, laying out a scenario in which the central bank might respond as infections and quarantines spread globally. The statement came as stock markets in the United States 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 Mr. Powell’s statement as a signal that the Fed would act soon to offset any economic fallout.
“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,” James Bullard, president of the Federal Reserve Bank of St. Louis, said during a speech in Florida on Friday. Mr. Bullard does not vote on rate moves this year, but he is one of 17 regional and Washington-based officials who participate in policy discussions. “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.”
Mr. Bullard’s statement does not signal that the Fed will definitely cut interest rates at its mid-March meeting, but it lays out the sort of scenario that could prompt a Fed response. As coronavirus cases mount in countries outside of China and fuel worries that the world is staring down a pandemic, expectations that the central bank will slash borrowing costs have skyrocketed. 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 United States, public health officials have warned that clusters of infection are very likely to appear, potentially resulting in quarantines and production slowdowns.
Investors had entirely priced in a March interest rate cut by Friday morning — a move that was viewed as barely possible just a week ago. Stock market indexes have slumped on virus worries, and money has been pouring into United States government securities as people look for safe investments, pushing prices up and the yields on 10-year Treasuries to record lows.
Loretta Mester, president of the Federal Reserve Bank of Cleveland and a monetary policy voter this year, told The New York Times in an interview on Thursday that the Fed should keep its options open. Ms. Mester, who is generally cautious about such moves, initially opposed the Fed’s decision to lower borrowing costs three times last year. President Trump, who has played down the economic threat to the United States from the virus, said on Friday that he hoped the Fed would step in soon and cut rates.
Updated Feb. 26, 2020
“I hope the Fed gets involved and I hope it gets involved soon,” Mr. 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 in March — something they saw as highly unlikely only a week ago. Economists at Bank of America wrote on 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 Mr. 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 preemptively to support the economy,” said Roberto Perli, an economist at Cornerstone Macro. “It’s missing a sense of timing.”
Mr. 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.”
The statement by the Fed chair underlines that the most important member of the 17-person Federal Open Market Committee is closely focused on an unfolding public health concern.
Loretta J. Mester, the president of the Federal Reserve Bank of Cleveland and a monetary policy voter this year, said in an interview on Thursday that the Fed should keep its options open. Ms. 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,” Ms. Mester said when asked whether a cut next month was possible.“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,” Ms. Mester said when asked whether a cut next month was possible.
Explaining the Fed’s calculus, Ms. Mester said officials are trying to gauge whether there will be longer-lasting economic effects from the virus, such as a hit to consumer confidence and demand. Explaining how she viewed the Fed’s calculus, Ms. 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.”“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.”
The comments also reflect a recognition that the virus could worsen, causing its economic drag to morph from a short-term blip to something that more seriously hits consumer confidence and spending.
Coronavirus cases in South Korea, Japan, and Italy are climbing fast. While there have been comparatively few confirmed infections in the United States, public health officials have warned that clusters of infection are likely to appear. Though he said he was optimistic that the virus would be contained, Mr. Bullard also declined to rule out a Fed rate cut in March, or even before, should things worsen.
Stock market indexes were down sharply Friday morning, after falling for the previous six straight days. Investors have been pouring into United States government securities as they look for safe investments, pushing prices up and the yields on 10-year Treasuries to record lows.
Mr. Bullard said he is optimistic that the virus could be contained and said the Fed’s three rate cuts last year should help to protect the economy, which is currently growing steadily.
“Markets might be overestimating the probability of a global pandemic,” he told reporters following his speech. “Data seem to suggest that we’ll have a public health response globally that will bring the virus under control.”
But he also declined to rule out a Fed rate cut in March, 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.”“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, Mr. Bullard said he didn’t “have a sense” of whether that was possible given the situation’s fluidity. Asked if the Fed would consider an emergency cut before its next meeting, Mr. Bullard said he also did not “have a sense” of whether that was possible.