Powell Opens Door to Rate Cut on ‘Evolving’ Risks From Virus

(Bloomberg) -- Federal Reserve Chairman Jerome Powell said the coronavirus “poses evolving risks” to the U.S. economy and signaled the central bank is prepared to cut interest rates if necessary to sustain the country's longest-ever expansion.

The rare statement issued Friday by Powell before the financial markets closed for the U.S. weekend came as stocks posted their seventh-straight daily loss, a slump which earlier prompted a string of Wall Street banks to predict the Fed would start reducing rates at its meeting next month, if not sooner.

Yields on U.S. Treasury securities, one of the world's safest assets, this week fell to record lows as investors turned increasingly concerned that the deadly virus would damage U.S. and global economic growth.

“The fundamentals of the U.S. economy remain strong,” Powell said in the four-sentence statement Friday. “However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

The missive recalls previous instances when the Fed changed course or had to address a budding crisis. When credit markets began to seize up in August 2007, the central bank issued a statement saying it was “prepared to act as needed.” Just last June, Powell said the Fed would “act as appropriate” to sustain the expansion.

The Fed cut rates at its meetings in July, September and October, but has since been on hold and indicated it planned to be so long as there was no “material change” to the outlook. The virus may now deliver such a shift in the economy amid mounting concern it's already hurt the Chinese economy and now threatens to damage supply chains, demand, tourism and trade elsewhere.

Read more: A Brief History of Central Bank Coordination as Debate Heats Up

The S&P 500 pared losses after the statement but remained lower for the day, closing down 0.8% on Friday and 11.5% lower over the week, the largest drop since 2008.

‘Squarely on the Table'

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said Powell has put an interest-rate cut “squarely on the table” for when the Federal Open Market Committee meets March 17-18 in Washington.

“This is a step in the right direction to help calm some of the concerns,” he said. “This is important in that they're saying they're not going to be stubborn here.”

Fed officials spent the week pushing back somewhat on the need for emergency rate cuts, saying there was too much uncertainty about the virus's economic impact despite its spread from China. There is also doubt over what lower rates would achieve given they may not prompt consumers or companies to spend if they're uncertain about the future or scared for their health.

But stocks kept sliding and economists started slicing their forecasts for the U.S. economy. Some started to warn of the weakest global expansion in a decade as the impact of the virus outbreak rippled from China to Europe and the Americas.

“I hope the Fed gets involved and I hope they get involved soon,” President Donald Trump, who's repeatedly pressured the Fed to cut rates, told reporters later on Friday.

The debate now is whether central bankers will wait until their March meeting or act quicker, as well as the size of a potential move.

Buys Time

“The statement buys some time with the caveat that they follow through with a rate cut,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “The question is, will it buy them enough time to reach mid-March? That is less clear.”

The statement released Friday was from Powell, not the full Fed Board nor from the FOMC, which has the ultimate say on rate moves in normal circumstances.

U.S. data are published with too much of a delay to make a strong case for a Fed move based on current economic reports. But officials could look at the crashing markets, fall in private-sector forecasts, earnings warnings by companies and the rise in the dollar to argue the virus has delivered a shock to demand that could slow inflation at a time when they are already striving to hit their 2% target.

Demand Shock

“Financial markets are suggesting that a very substantial demand shock is under way,” said Laura Rosner, a senior economist and partner at MacroPolicy Perspectives LLC, which sees cuts in March and April. “We are starting at a low base of inflation, so that certainly helps make the case as well.”

Goldman Sachs Group Inc. economists said Friday they now expect the coronavirus to inflict a “short-lived global contraction” on the world economy that forces the Fed to slash interest rates by 75 basis points over the first half of this year. Bank of America Corp. forecast a half-point cut at the Fed's March meeting to “stem the panic in markets.”

“While the statement is surely intended to calm markets and bridge to the scheduled March meeting it would allow the Fed to move earlier on an intermeeting basis if necessary,” said Krishna Guha, vice chairman at Evercore ISI in Washington.

--With assistance from Christopher Condon, Vince Golle and Josh Wingrove.

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alister Bull, Scott Lanman

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