Fed says coronavirus may pose risks to global growth

Jerome Powell says the coronavirus may pose risks to global growth, as the US Fed kept a key interest rate on hold.

Federal Reserve Chair Jerome Powell says it’s too early to speculate on the macroeconomic implications of the coronavirus for China. Picture: AP

Federal Reserve Chairman Jerome Powell said the fast-spreading coronavirus may pose risks to global growth, which has begun to stabilise amid signs of thawing trade tensions.

His comments came after the Fed left its benchmark interest rate unchanged and reaffirmed its make-no-moves posture.

Mr Powell said US central bank officials are carefully monitoring the coronavirus situation, but emphasised it’s too early to speculate on the macroeconomic implications for China.

“There will clearly be implications of course in the near-term for Chinese output and I would guess for their close neighbours,” he said at a press conference following the Fed’s policy meeting. “We’ll just have to see what the effect is globally.”

The number of people in China infected by the fast-spreading new virus surpassed that of severe acute respiratory syndrome, or SARS, nearly two decades ago.

British Airways and Indonesia’s Lion Air said they would halt all flights to mainland China, and American Airlines said it would suspend flights from Los Angeles to Shanghai and Beijing, citing a significant decline in demand for travel.

The World Health Organization said it would decide on Thursday whether to declare the outbreak an international public-health emergency, based on an increasing number of cases and evidence of human-to-human transmission outside of China.

More broadly, Mr Powell said there are reasons for cautious optimism about the global economic outlook, including easier financial conditions, lower odds of Brexit disruptions, a rebound in the hi-tech manufacturing industry in Asia and easier financial conditions.

“Many analysts are predicting a pick up in growth this year, although still to relatively modest growth rates,” he said.

A worker in Wuhan undergoes a health check. Picture: Getty Images

Rates on hold

Fed officials last month signalled they were comfortable holding rates steady while they gathered evidence on how three rate cuts last year had cushioned the economy against a global growth slowdown.

They maintained that view on Thursday in their postmeeting statement by repeating nearly verbatim the policy outlook expressed in December.

The statement offered a mixed assessment of the economic outlook. It described consumer spending as moderate, a downgrade from “strong” in December, and said business investment had stayed weak.

Fed officials described the current setting of the benchmark federal-funds rate as one that would help bring inflation back to the Fed’s 2 per cent target after falling shy of the goal last year. Officials “will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures,” the statement said.

All 10 members of the central bank’s rate-setting committee voted to hold the fed-funds rate in a range between 1.5 per cent and 1.75 per cent.

To keep the benchmark rate trading near the midpoint of that range, they also decided to slightly increase a separate rate, the interest rate paid on bank deposits, or reserves, held at the Fed, to 1.6 per cent from 1.55 per cent.

The technical adjustment amounts to a housekeeping move after the Fed flooded markets with cash in September to prevent money-market volatility from pushing the fed-funds rate out of its range. The Fed had lowered the interest rate on reserves closer to the bottom of the fed-funds range in September as part of those efforts.

The paucity of changes in the Fed’s outlook meant all eyes were on Fed Chairman Jerome Powell’s news conference, where he addressed the central bank’s balance-sheet policy and new global developments that have spooked investors, such as China’s coronavirus outbreak.

“If developments emerge that cause a material reassessment of our outlook, we would respond accordingly,” Mr Powell said.

Since Fed officials’ December meeting, financial markets had been ebullient due to a ceasefire in trade hostilities between the US and China accompanied by glimmers of firmer global manufacturing activity.

Investors had also been cheered by Mr Powell essentially ruling out reversing last year’s rate cuts for the foreseeable future when he said such a step would require a persistent and sustained rise in inflation -- one that most analysts and Fed officials regard as remote.

The Fed became especially sensitive to global developments last year, shelving in January plans to continue lifting rates before turning toward cutting them in July amid declines in market-based rates and unexpectedly soft inflation readings.

While Fed officials are holding rates steady for now, they have signalled they see greater risks of surprises that could force them to lower rates than to lift them. The coronavirus is the latest example of such a development.

The viral outbreak in central China has resurfaced investors’ trepidation about slower growth in China holding back the global economy, just as manufacturing surveys were showing signs of stability. Mr Powell said it was too soon to say how the virus would affect Chinese, global and US growth.

The health scare erupted just as worries about the US-China trade war receded, with President Trump signing a partial trade agreement on January 15, and as lawmakers in Brussels and London paved the way for the United Kingdom’s departure from the European Union.

“There are grounds for what I would call cautious optimism for the global economy,” said Mr. Powell. “We are not at all assured of a global rebound but there are signs and reasons to expect it -- and then comes the coronavirus.”

US economic data have held steady. Payroll growth in December was strong enough to hold the unemployment rate at a 50-year low, though wage growth decelerated. Employers added more than 184,000 jobs on average over the three months ended December.

Slow rates of domestic car production, lower shale-drilling activity and slack demand from China have all weighed on US manufacturers. Boeing Co.’s decision to first slow and then suspend production of its 737 MAX jetliner has also been working its way through the company’s supply chain. New orders for capital goods, a proxy for business investment, fell in December from the previous month, the Commerce Department said.

Excluding volatile food and energy categories, consumer prices rose 1.6 per cent in November from a year earlier, according to the Fed’s preferred gauge. Inflation held at the central bank’s 2 per cent target in 2018, but ran below the goal last year.

Mr Powell has signalled concern that inflation could drift lower if officials can’t credibly meet their goal after many years of prices holding below the target -- because households and businesses will come to expect still-lower inflation.

Dow Jones Newswires