By Nick Timiraos
WASHINGTON -- A top Fed official said Tuesday it is too early to
tell whether the coronavirus outbreak will force the central bank
to resume rate cuts in the coming months.
Disruptions from the outbreak in China "could spill over to the
rest of the global economy," Fed Vice Chairman Richard Clarida said
in a speech Tuesday. "But it is still too soon to even speculate
about either the size or the persistence of these effects, or
whether they will lead to a material change in the outlook."
Markets and global events are giving central bankers a case of
déjà vu. Last year, the threat of a growth downturn exacerbated by
trade uncertainty prompted the Federal Reserve to cut interest
rates. Now, the potential for virus-related disruptions that roil
supply chains, output and travel is again putting the Fed in a
delicate spot.
The coronavirus has led to significant quarantines in China
since January, initially focusing attention on how much a hit the
global economy might take from idled production in the world's
second-largest economy.
Signs that the virus is spreading -- other countries across
Europe and Asia reported more cases in recent days -- led to a
deepening rout in global financial markets Tuesday. Stocks fell
after hitting highs over the past two months and the yield on the
benchmark 10-year U.S. Treasury note closed at a new low.
Mr. Clarida said the Fed doesn't set policy based on day-to-day
market movements. Instead the Fed looks at whether broad and
sustained changes in stocks, bonds and currencies influence
household wealth and business and consumer confidence.
"You have to look at credit availability. You have to look at
confidence, " he said.
Investors have been placing growing bets on rate cuts later this
year in interest-rate futures markets, according to CME Group, with
markets expecting the Fed to have cut at least once by June and
again by December.
A substantial decline this year in long-term yields means
borrowing costs have already grown more favorable. Probabilities
for a rate cut at the Fed's next scheduled meeting, on March 17-18,
rose to around one in three on Tuesday, up from one in 10 last
week, according to futures markets contracts calculated by CME
Group.
Mr. Clarida said monetary policy isn't on a preset course and
decisions "will proceed on a meeting-by-meeting basis."
Fed Chairman Jerome Powell has said the central bank will want
to see evidence that disruptions are persistent and material for
the U.S. economy before cutting interest rates.
"There's just great uncertainty around where this virus is going
to go and when the full effects are going to be realized, so I'm
open minded," Minneapolis Fed President Neel Kashkari said in an
interview Monday. "I don't see any urgent need to move until we
have more information."
Dallas Fed President Robert Kaplan echoed those sentiments in an
interview Tuesday. "We are a number of weeks away from being able
to make the judgment" about whether a rate change is needed, he
said.
Among the challenges facing the Fed: With its benchmark rate
between 1.5% and 1.75%, the central bank has less room to stimulate
growth by cutting rates, which are already historically low.
Fed officials have demonstrated a willingness over the past year
to ease policy to defuse looming economic threats. An escalation of
the U.S. trade war with China beginning last May prompted the Fed
to cut rates beginning in July.
"The interconnectedness of our economies means that literally,
no man is an island. If one economy starts to struggle, the
spillover effects onto others can take hold rapidly," New York Fed
President John Williams said in a speech last November, shortly
after the Fed called an end to its series of cuts.
A separate issue is that monetary stimulus may not be a neat
tool for addressing near-term virus disruptions. "Monetary easing
works best when interest rates are relatively high and the economy
faces a demand shock. Neither is the case here," said Roberto
Perli, an analyst at Cornerstone Macro.
Investors are concerned about the global economy due to the
potential for supply-chain disruptions, especially in Asia, and
confidence shocks that can't be easily repaired with lower interest
rates. Rate cuts are designed to encourage more households and
businesses to spend and invest today, rather than wait until
tomorrow.
If factories are closed and supply chains are disrupted, lower
interest rates may have less immediate effect. "At best,
monetary-policy easing should be thought of as something that can
facilitate the rebound when the virus is contained, not as
something that can prevent growth deterioration now," Mr. Perli
said.
Negative rates in Europe and Japan have left central bankers in
those countries with less room to counteract a downturn if growth
sputters amid virus-related disruptions. "Japan doesn't have the
ability to smooth out a coronavirus shock" with monetary policy,
said Jason Cummins, an economist at hedge fund Brevan Howard.
The lack of a robust policy response to slowdowns abroad is "the
exact kind of potential mechanisms through which the U.S. economy
can be affected," said Cleveland Fed President Loretta Mester on
Monday. Along those lines, the prospect for slower global growth
last year "affected our monetary policy and our assessment of the
outlook."
--Michael S. Derby contributed to this article.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
February 25, 2020 17:48 ET (22:48 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.