COVID-19 and the economy: Fed-rate-cut calls grow as coronavirus spreads globally

How badly is the coronavirus damaging the global economy? How much is the resulting COVID-19 illness hurting American businesses, consumers and the U.S. economy? Here’s an ongoing MarketWatch update on what the economic pros are saying.

• Goldman Sachs said Friday that the spreading coronavirus is likely to do a lot of damage to the global economy in the first half of the year, forcing the Federal Reserve and other central banks around the world to cut interest rates.

To stave off further damage, the Fed will reduce a key short-term interest rate in the next four months to a range of 0.75% to 1% from a current target range of 1.5% to 1.75%, Goldman Sachs believes.

Barclays is also among those predicting the Fed will cut rates soon.

Opinion: The Fed can’t stop coronavirus from hitting the economy, but it can ease the pain

• St. Louis Federal Reserve Bank President James Bullard has been outspoken in the past few years about the need for lower U.S. interest rates, but he’s holding the line for now. He said after a speech on Friday that investors might be “overestimating” the likelihood of a debilitating global pandemic resulting from the coronavirus.

• PNC Financial Services cut its forecast for U.S. growth in the first six months of 2020 to an annualized rate of 1.2% from 1.5%. Pittsburgh-based PNC sees a strong chance that the economy recovers and rebounds later in the year, but it acknowledges the outlook is very hazy.

“There is a great deal of uncertainty surrounding the spread of COVID-19, the situation is very fluid, and the economic damage could be much larger than currently expected,” PNC said.

• The large insurer Nationwide likewise expects a “V”-shaped recovery.

“If COVID-19 follows the pattern from previous epidemics (e.g. SARS in 2003) the effects on economic growth, interest rates, and financial markets should be resolved within a few more months as infections decline and economic activity resumes,” Nationwide said. “Our baseline forecast assumes little impact on economic growth over the course of the year.”

• Are past episodes of viral outbreaks such as the Spanish flu (1918), Asian flu (1957) or the Hong Kong flu (1968) really helpful in gauging what happens this time around?

“It is reasonable to question how meaningful these comparisons are. We have only three examples, and the most recent of them took place over 50 years ago,” said senior markets economist Oliver Jones of Capital Economics.

His verdict? “The severity of the coronavirus outbreak, as well as the scale of the response from policy makers and investors, suggests that recent epidemics are no longer a very useful guide to where markets will go next.”

• Given the widespread uncertainty about COVID-19, said economist Avery Shenfeld of CIBC Economics, the Fed might better off safe than sorry.

“Those who argue that a monetary ease isn’t the right response to a supply shock miss the point: Everyone hunkering down at home is also an even larger demand shock. The theater could have the movie playing, but nobody is showing up to see it,” he said.

“Central banks have also eased to shore up confidence in financial assets when the dive steepens enough,” he said.

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