Central Banks Adopt Cautious Outlook on Coronavirus
Central bankers are adopting a cautious stance as they consider how the coronavirus outbreak in China could ripple through the global economy in the coming months.
Over two days of hearings on Capitol Hill, Federal Reserve Chairman Jerome Powell offered an upbeat assessment of the U.S. economy while warning of risks to global supply chains from production shutdowns in China.
Mr. Powell, during testimony Wednesday before the Senate Banking Committee, also cited the prospect of a hit to tourism and exports and financial markets as ways the virus could dent U.S. economic growth.
“We’ll begin to see it in economic data coming up fairly soon. It’s too uncertain to even speculate about what the level of that will be,” said Mr. Powell.
Mr. Powell said the central bank will want to see evidence that disruptions stemming from China, the world’s second-largest economy, are persistent and material for the U.S. economy before it would consider cutting interest rates.
Mr. Powell’s Fed colleagues have echoed his message in recent days. “If the situation gets significantly worse, and we start to see significant impact on the U.S. economy, then we’d have to think about accommodation. But I don’t think we’re at that point right now,” said Philadelphia Fed President Patrick Harker during a moderated discussion in Newark, Del., on Monday. “We just need to let this play out.”
No sooner had the U.S. and China signed a deal that eased trade tensions last month than the coronavirus outbreak in China rekindled doubts about the global economy’s prospects in 2020.
Central banks moved aggressively last year to provide stimulus to cushion the global economy from slower growth amplified by trade tensions. Fed officials cut their benchmark federal-funds rate three times last year, to a range between 1.5% and 1.75%, after raising it four times in 2018.
The head of New Zealand’s central bank, which surprised markets last August by making a half-percentage-point cut to its policy rate amid worries about a global growth slowdown, said this week the benefits of an “insurance” rate cut to address disruptions from the coronavirus weren’t clear.
The governor, Adrian Orr, said the central bank’s current projection of a short-lived impact from the epidemic was partly based on travel restrictions being lifted by March.
Policy makers in Australia also held their policy rate steady last week. Compared with the 2003 outbreak of the SARS virus, the coronavirus’s “interruption of the Chinese economy in the short-term may be greater,” said Philip Lowe, governor of Australia’s central bank, last week.
“It’s important we don’t catastrophize here,” he said. “It’s possible this does not work out well, but it’s also possible that the SARS experience is a reasonable guidepost to what happens here.”
Meantime, Thailand’s central bank last week unexpectedly cut its benchmark interest rate to a record low. The Philippine central bank also cut overnight lending rates last week.
China serves as the hub of global supply chains for numerous products, including cars and computer chips. Beijing has imposed quarantines that have idled factories, while air travel to the country has been curtailed.
Those disruptions threaten to drive commodity prices lower, which could lead to lower inflation. An index of commodity prices maintained by IHS Markit last week posted its fifth-largest weekly drop in its 25-year history and fell to a three-year low.
In the U.S., stock markets paused after racing to records last month and have traded higher on news that the virus’s spread may have slowed. Meantime, bond yields have slid, reflecting greater uncertainty about whether growth might slow if the epidemic isn’t quickly contained.
The Fed’s semiannual report to Congress, released last week, repeatedly highlighted the potential growth headwinds from the coronavirus and cited fragilities in China’s corporate and financial sector that, it said, leave it vulnerable to adverse developments.
“Because of the size of the Chinese economy, significant distress in China could spill over to U.S. and global markets through a retrenchment of risk appetite, U.S. dollar appreciation and declines in trade and commodity prices,” the report said.
Fed officials grew especially sensitive to global developments last year in part because weaker growth abroad made it harder for the central bank to keep U.S. inflation at its 2% goal.
Source: Dow Jones