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US central bank won’t shift rates but virus adds new risk factor
WASHINGTON, Jan 29, 2020 (BSS/AFP) – The Federal Reserve is widely expected
to leave its key interest rate unchanged on Wednesday, but the deadly SARS-
like virus spreading in China adds a new element to keep policymakers on
alert.
The US economy is on a steady though tepid growth path, but the outbreak
of the novel coronavirus that has spread to other countries has fueled
concerns it could slow growth in China and the effects will spill over to the
global economy.
Businesses, including more than half of all Starbucks and a Disney theme
park have been shuttered in China, travel has been restricted, and major
airlines have cancelled flights as authorities in Beijing try to contain the
illness that has sickened thousands and killed more than 100 people.
The Fed’s policy-setting Federal Open Market Committee (FOMC) will wrap up
the second day of deliberations at 1900 GMT Wednesday and likely will repeat
recent statements saying it will keep watch on “global developments.”
Fed Chairman Jerome Powell is likely to face questions about the virus in
his customary press conference following the policy decision and likely will
say that central bankers are keeping a watch for economic contagion from the
ailment.
Economist Joel Naroff said the virus could become a factor in policy if it
hits financial markets “and if there are clear signs it will slow the
economy.”
“Powell seems to worry more about the markets than anything else even if
he never says that,” Naroff told AFP by email, noting the Fed’s decision to
stop raising interest rates at the end of 2018 “even though the economy
continued on its merry way.”
The Fed cut the policy rate three times in 2019 amid signs the US and
global economies were facing headwinds — in part due to President Donald
Trump’s multi-pronged trade war that undercut growth.
“That could happen again, but he has no cushion this time as he ate up 75
bps (basis points) with the last set of easing,” Naroff said of Powell.
The Fed chief has signaled that the central bank is only likely to move if
there is a “material” change to the economic outlook.
“That bar has not been met,” said Ian Shepherdson of Pantheon
Macroeconomics.
“Even manufacturing, which is the weakest part of the economy, is merely
stagnating rather than rolling over,” he said in a preview of the Fed
decision.
A trade truce between Washington and Beijing signed earlier this month had
boosted stock markets worldwide amid hopes it would provide stability for
businesses, but most of the punitive tariffs remain in place.
The virus undermined the recent stock markets gains, although Wall Street
rebounded on Tuesday.
BSS/AFP/AU/08:10 hrs