Fed’s Kaplan Signals Virus Spread May Be Key to Another Rate Cut

(Bloomberg) -- Federal Reserve Bank of Dallas President Robert Kaplan said the pace of acceleration in the coronavirus across the U.S. will be an important factor as he weighs the need for another interest rate cut when policy makers meet later this month.

“I am going to be watching very, very carefully the path of diagnosed cases,” Kaplan said Thursday in a Bloomberg TV interview with Kathleen Hays in Chicago. “We're just going to have to see what the actual developments are over the next 10 days, two weeks. That will be a key factor, yes, I will be using to judge what's appropriate and whether we can wait longer.”

Kaplan backed the central bank's decision Tuesday to slash interest rates by half a percentage point in the first such emergency move since the 2008 financial crisis, amid mounting concern that the coronavirus outbreak threatens to stall the record U.S. economic expansion.

Investors weren't impressed, and stocks have sung wildly this week amid expectations that the Fed will have to cut again when the Federal Open market Committee holds its next scheduled meeting on March 17-18 in Washington.

Investor confidence has been shaken as cases of the virus continue to spread across the U.S. The S&P 500 fell more than 3% Thursday while the 10-year Treasury yield sank to as low as 0.9% and the dollar sank against the yen.

Kaplan, who votes on policy this year, said he wasn't disturbed by market responses because his goal wasn't related to today's financial conditions, adding that monetary policy isn't intended as a tool to eliminate volatility. Rather, as the virus's impact spreads more widely, lower rates could help to counter a future tightening of financial conditions.

Faster Recovery

“It will help to moderate or mitigate some of that inevitable tightening of financial conditions,” he said. That will increase “the likelihood as we come out of this situation, we can come out more strongly.”

The Dallas Fed chief was speaking on the eve of the release of the monthly U.S. employment report. But Kaplan said government reports may shed less light on how the virus was affecting economic activity given it takes time to show up in the data.

“It is too soon to judge,” he said. “I wouldn't presume what we are going to do in the March meeting.”

Fed officials haven't endorsed market expectations of another rate cut, with Chairman Jerome Powell giving no clear signals in a press conference following this week's reduction. James Bullard, St. Louis Fed president, said Wednesday it would be wrong to assume that the Fed would cut rates again in two weeks because there might be little new information on which to justify an additional move. He also said the policy committee could always act between meetings if necessary.

Kaplan also said that fiscal policy may have a role to play in mitigating the virus's impact. Some central banks abroad have discussed measures to keep credit flowing to small businesses suffering a credit crunch because of the fallout from the virus, which has shuttered factories in China and disrupted global supply chains.

Kaplan said the Fed doesn't have the tools to undertake such targeted lending.

“What we can do is encourage banks to exercise forbearance with small borrowers,” he said.

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net

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

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