Fed Official: If Coronavirus Makes ‘Significant Impact’ on US Economy, Interest Rate Cuts May Be in Order

February 11, 2020 Updated: February 11, 2020
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Philadelphia Federal Reserve Bank President Patrick Harker said that if the coronavirus-related economic malaise now hurting China spills over and deals the U.S. economy a material blow, the Fed may be forced to drop interest rates to contain the fallout.

“It’s too early to say what impact the spread of the coronavirus will have on the global economy, but the negative effects on the Chinese economy and international travel are something to watch,” Harker said in a speech at the University of Delaware in Newark on Monday.

During a panel after he delivered his remarks, Harker was cited by Reuters as saying that if the economic contagion from the virus outbreak in China “gets significantly worse” and impacts American businesses, the Fed would consider a rate cut.

“If the situation gets significantly worse and we start to see significant impact on the U.S. economy, then we have to think about accommodating,” Harker said, adding, “But I don’t think we’re at that point right now.”

Harker added he believes the U.S. economy is in good shape and the Fed should maintain rates at the current target range of between 1.5 and 1.75 percent.

“My own view right now is that we should hold steady for a while and watch how developments and the data unfold before taking any more action,” Harker said.

Epoch Times Photo
Federal Reserve Bank of Philadelphia President Patrick Harker (L) and Rep. Lisa Blunt Rochester (D-Del.) interact with Urban Acres garden director Mike Minor (R) during a Federal Reserve Bank of Philadelphia community tour in Wilmington, Delaware, in 2017. (Courtesy of the Federal Reserve Bank of Philadelphia)

Both Harker’s “wait-and-see” stance on rate cuts and acknowledgment of the economic risks of coronavirus echo those of Federal Reserve Chairman Jerome Powell, who on Tuesday warned lawmakers that the epidemic sweeping China could threaten other economies, but said he was comfortable with interest rates at current levels.

“We are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy,” Powell said in prepared remarks during a Congressional testimony before the House Financial Services Committee.

“Powell’s appearance was consistent with his recent post-FOMC news conference,” said Mark Hamrick, Senior Economic Analyst at Bankrate, in an emailed statement to The Epoch Times. “The message is that benchmark interest rates will likely remain where they are for the foreseeable future, while reminding that if developments occur causing a change in the outlook, the Fed will respond as needed. That’s another way of saying rates will stay where they are, until they don’t.”

“The message from the testimony from a monetary policy standpoint is that Powell believes the economy is in good shape, but that the specter of a worsening coronavirus, if that indeed happens, could force the Fed’s hand and result in easing,” said Robert Johnson, Professor of Finance at Heider College of Business, Creighton University, in an email to The Epoch Times. “My belief is that unless the coronavirus worsens the Fed will likely stay on the sidelines the rest of the year—neither cutting or raising rates.”

Harker, who became a voting member for policy decisions last year, did not support the last two rate cuts. He said before last month’s meeting of the Fed’s rate-setting body that there could be downside to lower rates, which could encourage investors to take more risk.

Powell, meanwhile, said in his remarks Tuesday that persistently low interest rates have hampered the central bank’s ability to respond to an economic downturn, adding that fiscal stimulus would then have to play a bigger role in keeping the economy afloat.

“This low interest rate environment may limit the ability of central banks to reduce policy interest rates enough to support the economy during a downturn,” Powell said, adding that “the current low interest rate environment also means that it would be important for fiscal policy to help support the economy if it weakens.”

Epoch Times Photo
Federal Reserve Chairman Jerome Powell testifies during a House Financial Services Committee hearing on Capitol Hill in Washington on July 10, 2019. (Zach Gibson/Getty Images)

“Zero rates have two main effects,” explained Joseph Trevisani, a Senior Analyst at FXStreet. “They habituate an economy to an artificially low cost of money and they destroy the central bank’s ability to respond to economic downturns,” he said.

“It is now apparent rates are still too low to provide the 3 – 4 percent of stimulus historically available in a recession,” Trevisani told The Epoch Times in a statement. “If the U.S. falters the Fed will need the help of government spending to keep the economy afloat.”

The U.S. economy is in its 11th year of a record-long expansion.

Harker, in his speech, hailed labor market strength and high consumer confidence but complained businesses were reluctant to invest in hiring and equipment.

“My positive view about the consumer contrasts with concerns about business investment,” Harker said. “Spending on new plant and equipment and intellectual property is lagging, and the uncertainty attached to fiscal and other policies has continued to hold spending back.”

He also blamed the weak capital expenditures on uncertainty over trade, the global economy, and geopolitical tensions.

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