BY SYLVAN LANE - 02/26/20
06:02 AM EST 349
The
spread of the coronavirus is posing a dire challenge to the Federal Reserve as
it seeks to keep the economy stable and defend its independence from President Trump’s attacks.
The Fed
has indicated a desire to keep interest rates steady this election year after
navigating both a trade war and a global downturn in 2019. But, even as bank
officials say it is too soon to react to the outbreak, that stance is being put
to the test.
U.S.
financial markets are now betting on an interest rate cut after a two-day Wall
Street rout obliterated six weeks of stock gains amid coronavirus fears. The
Dow Jones Industrial Average closed with a loss of 879 points, or 3.2 percent,
on Tuesday, while the S&P 500 and Nasdaq composite fell 3 percent and 2.8
percent, respectively. Tuesday’s plunge followed a Monday loss of 1,031 points,
or 3.6 percent, its worst day since February 2018.
The
bloody stretch of stock losses could extend further as worries about the
coronavirus grow within the U.S.
Officials
with the Centers for Disease Control and Prevention (CDC) warned Tuesday that
the U.S. must prepare for an inevitable coronavirus outbreak in the states.
“It’s
not a question of if this will happen but when this will happen and how many
people in this country will have severe illnesses,” said Nancy Messonnier, a
top CDC official. “Disruption to everyday life might be severe.”
The
stark warning from federal health officials spurred further alarm among
investors who are bracing for an outbreak to spread within the U.S. and dampen
the economy. Market expectations of a Fed rate cut in March rose to 27.7
percent Tuesday from just 11.1 percent a week ago, according to investment firm
CME Group.
The
central bank is already facing a difficult balancing act on rates.
Fed
officials have been reluctant to cut rates further after slashing borrowing
costs three times last year, bringing the central bank’s baseline range to just
1.5 to 1.75 percent. With rates so close to an effective rate of 0 percent,
economists fear that a minor reduction would do little to handle a global
supply shortfall and cost the Fed crucial room to cut rates in the event of a
crisis.
“They
won’t want to cut rates too soon and then immediately see the pace of new
infections quickly diminish and an inventory correction occur suddenly. Some
officials may even question the usefulness of a rate cut in the face of a
supply side shock,” wrote University of Oregon economic professor Tim Duy in a
Tuesday analysis.
Several
members of the Federal Open Markets Committee, which sets Fed interest rates,
have spoken out against cutting over the past four days, even as confirmed
cases topped 80,000 amid new breakouts in Italy and a sharp increase in cases
in South Korea. The Fed held rates steady at its January meeting and is
expected maintain that stance without a major shift in the economy.
Fed
Vice Chairman Richard Clarida said in a Tuesday speech that “it is still too
soon” to gauge the potential economic impact the outbreak could have on the
U.S., adding that the Fed will “respond accordingly” to “a material
reassessment of our outlook.”
Clarida’s
comments echoed similar remarks from several Federal Reserve Bank presidents
—including Loretta Mester of Cleveland, Raphael Bostic of Atlanta and James
Bullard of St. Louis — who played down the need for a March rate cut over the
past few days.
But the
economic toll of a prolonged outbreak also raises the risk of Trump’s ire as he
seeks reelection on the strength of the economy.
Trump
and top administration officials, who regularly pressure the Fed to cut rates
amid stock downturns, have tried to soothe the fears of a pandemic driving Wall
Street’s losses.
“We
have very few people with it,” Trump told reporters at a press conference in
New Delhi on Tuesday, saying it was “well under control” in the U.S.
“The
people are getting better. They’re all getting better,” Trump said.
Larry Kudlow,
director of the White House National Economic Council, also claimed during a
CNBC interview Tuesday that the U.S. had contained the coronavirus despite
warnings from CDC officials.
“I
won’t say [it’s] airtight, but it’s pretty close to airtight,” Kudlow said on
CNBC’s “The Exchange.” He added that he doesn’t expect the Fed to make a “panic
move” and cut, though he would like to see interest rates lower for reasons
beyond the outbreak.
The
Trump administration’s sunny response may falter if coronavirus cases spread
within the U.S. or derail the global economy enough to cause a protracted stock
downturn.
Economists
at Goldman Sachs warned last week that the coronavirus could cause a stock
market correction, which is considered a 10-percent decline from the most
recent peak, before the weekend’s sharp increase in infections.
Trump
often ties the success of his economic agenda to the rise of the stock market
while blaming the Fed for even minor downturns. The president has piled
unprecedented pressure on the Fed and its chairman, Jerome Powell, to pump a
steady economy with crisis-level stimulus.
“When
Jerome Powell started his testimony today, the Dow was up 125, & heading
higher. As he spoke it drifted steadily downward, as usual, and is now at -15.
Germany & other countries get paid to borrow money. We are more prime, but
Fed Rate is too high, Dollar tough on exports,” Trump tweeted on Feb. 11 as
Powell testified before a House committee.
Trump
also reportedly considered trying to fire Powell in December 2018, likely in
defiance of federal law, as the stock market cratered amid fears of a global
recession.
The Fed
has largely ignored Trump’s pressure and took great pains to distance its three
2019 rate cuts from any political considerations. But Trump’s pressure is
likely to intensify if the markets continue their slide.
Economists
also warn that even if the Fed finds a rate cut necessary, it may do little to
counter the immediate severe supply shortages and travel shutdowns of the
outbreak. Even as it faces pressure to act, the Fed’s options may be limited.
“A Fed
rate cut will bolster financial conditions but it will take months to filter
through to the real economy,” said Joe Brusuelas, chief economist at U.S. tax
and audit firm RSM, in a Tuesday email.
Brusuelas
warned that if the coronavirus outbreak slumps the U.S. economy, it could take
a special lending facility from the Fed and fiscal action from Congress to
counter the damage.
“The
agencies that could help like the [Small Business Administration] need to be
mobilized now and additional trade finance will need to be considered.”
Morgan
Chalfant contributed.
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