Federal Reserve Chairman Jerome Powell said the coronavirus “poses evolving risks” to U.S. economic growth and signaled the central bank is prepared to cut interest rates if necessary to sustain the country’s longest-ever expansion.
The statement issued Friday by Powell before the financial markets closed for the U.S. weekend came as stocks posted their seventh-straight daily loss, a slump which earlier prompted a string of Wall Street banks topredict the Fed would start reducing rates at its meeting next month, if not sooner. Yields on U.S. Treasury securities, one of the world’s safest assets, have fallen to record lows.
“The fundamentals of the U.S. economy remain strong,” Powell said in a four-sentencestatement Friday. “However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”
The missive, while rare, recalls previous instances when the Fed changed course or had to address a budding crisis. When credit markets began to seize up in August 2007, the central bank issued astatement saying it was “prepared to act as needed.” Just last June, Powellsaid the Fed would “act as appropriate” to sustain the expansion. The Fed cut rates at its meetings in July, September and October.
The S&P 500 pared losses after the statement was remained lower for the day, closing down 0.8% on Friday and 11.5% lower over the week, the largest drop since 2008.
‘Squarely on the Table’
Michael Feroli, chief U.S. economist atJPMorgan Chase & Co. in New York, said Powell has put an interest-rate cut “squarely on the table” for when the Federal Open Market Committee meets March 17-18 in Washington.
“I think this is a step in the right direction to help calm some of the concerns,” he said. “This is important in that they’re saying they’re not going to be stubborn here.”
Fed officials spent the week pushing back somewhat on the need for emergency rate cuts, saying there was too much uncertainty about the virus’s economic impact despite its spread from China.
But stocks kept sliding and economists have been slicing their forecasts for U.S. growth this week. Some started towarn of the weakest global expansion in a decade as the impact of the virus outbreak rippled from China to Europe and the Americas.
The question now is whether central bankers will wait until their March meeting or act sooner, as well as the size of a potential cut.
“The statement buys some time with the caveat that they follow through with a rate cut,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “The question is, will it buy them enough time to reach mid-March? That is less clear.”
The statement released Friday was from Powell, not the full Fed Board nor from the FOMC, which has the ultimate say on rate moves in normal circumstances.
U.S. data are published with too much of a delay to make a strong case for a Fed move based on current economic reports. But officials could look at the fall in private-sector forecasts, earnings warnings by companies and the rise in the dollar to argue the virus has delivered a shock to demand that could slow inflation at a time when they are striving to hit their 2% target.
“Financial markets are suggesting that a very substantial demand shock is under way,” said Laura Rosner, a senior economist and partner at MacroPolicy Perspectives LLC, which sees cuts in March and April. “We are starting at a low base of inflation, so that certainly helps make the case as well.”
Goldman Sachs Group Inc. economistssaid they now expect the coronavirus to inflict a “short-lived global contraction” on the world economy that forces the Fed to slash interest rates in the first half of this year. On Thursday, economists at Bank of America Corp. said they anticipate global growth will be the weakest this year since 2009.
Bank of Americaforecast Friday a half-point cut at the Fed’s March meeting to “stem the panic in markets.”
— With assistance by Christopher Condon, and Vince Golle
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