Federal Reserve Vice Chair Richard Clarida said on Tuesday that the central bank is “closely monitoring” the impact of the coronavirus epidemic on the U.S. economy but that it is too soon to say if it will lead to a “material change” in the economic outlook, the Fed’s oft-repeated criterion for a potential interest rate cut.
Clarida acknowledged that the spread of the deadly virus held downside risks.
“The disruption [in China] could spill over to the rest of the global economy,” Clarida said, but added that he believed the U.S. economy was well-poised to withstand the impact of the outbreak.
“In its 11th year of a record expansion, the U.S. economy is in a good place,” the Fed’s no. 2 said. “The labor market remains strong, economic activity is increasing at a moderate pace, and the Federal Open Market Committee’s (FOMC) baseline outlook is for a continuation of this performance in 2020.”
Other Fed officials have warned of the risk of economic spillover, but similarly said it was too early to determine the extent of the impact.
“At this point, it is difficult to assess the magnitude of the economic effects, but this new source of uncertainty is something I will be carefully monitoring. I’ve incorporated it as a downside risk to my modal forecast, which calls for growth to continue at trend, slightly slower than the pace of last year, with continued healthy consumption growth and some pickup in investment spending.”
The Fed held rates steady at its first meeting of the year in late January and has said it would not make cuts unless there was a material change to the economic outlook.
Wall Street ‘Fear Gauge’ Spikes
In a sign of ongoing market turbulence, the VIX volatility index, also known as Wall Street’s “fear gauge,” spiked to 30.2 on Tuesday, with the ceiling of 30 widely seen as the threshold demarcating major market uncertainty and investor anxiety.
On Monday, when Wall Street was in the grip of a massive rout, the VIX shot up to 26.2.
“For now, there appears little prospect that financial markets look likely to settle down in the short term, which means investors will have to get used to an extended period of uncertainty and volatility,” Hewson added.
While the Fed has so far held fast to its wait-and-see stance on rates, markets have been increasing their bets that the Fed will soon cut in the face of the coronavirus fallout.
“Our base case is for two cuts this year, with a higher probability of three cuts than one cut,” said Allen Sukholitsky, chief macro strategist at Xallarap Advisory, in an emailed statement to The Epoch Times.
