The urban press is laser-focused on the rapidly spreading impacts of the coronavirus just now. Fed chair Jerome Powell is scheduled to appear before a couple of congressional committees this week and certainly will face strong scrutiny regarding developments and plans for key economic policies.
As might be expected, Powell is confessing that he finds it “very hard” to understand China’s economy--and that the disease outbreak “has made that exponentially more difficult.”
Certainly, these issues are seen as “too important to ignore,” Bloomberg thinks because of the sheer size of the economy—so that “any hit to its growth from the epidemic will have a knock-on impact for the rest of the world and the US,” and much of the world is worried.
The effects of the coronavirus in China are generating a “prominent new risk to the outlook,” the U.S. central bank wrote in its semi-annual report to Congress released on Friday.
Just how big that risk is--and the expected Fed response—certainly will key topics as Chairman Powell kicks off two days of Congressional testimony before the House Financial Services Committee, and then to the Senate Banking panel.
Lawmakers also will likely press Powell for the rationale behind the big run-up in the Fed’s balance sheet that’s occurred since September’s turmoil in the money markets.
Bloomberg also notes that the testimony comes on the heels of the impeachment fight and ahead of November elections so the hearings—like almost everything else—almost certainly will be “politically contentious” as lawmakers from both parties pepper Powell with questions.
“He is going to have his Kevlar on,” said Ward McCarthy, chief financial economist at Jefferies LLC. “All of the questions will have some political connotations.”
Ahead of the hearings, traders in the federal funds futures market are betting that Powell and his colleagues will respond to the virus with a cut in interest rates later this year.
Still, given all the unknowns involved, Fed watchers say Powell is unlikely to be that clear about the Fed’s intentions. But he’s just as unlikely to dismiss the threat and rule out any response.
“There’s little upside to trying to sound too confident,” said former Fed researcher Michael Feroli, who is now chief U.S. economist at JPMorgan Chase & Co. “At least when I was there, there weren’t any virologists on the board.”
Bloomberg also notes that its own economists think that “the underlying hiring trend is robust, providing a sturdy foundation for domestic growth,” although this is due to be challenged in the relatively near term by weak global growth in general and coronavirus supply-chain disruptions in particular.
In the meantime, private sector economists have started to shave their estimates of U.S. growth due to the coronavirus. Feroli cut his first-quarter forecast to 1%, though he expects activity to bounce back in the second quarter.
Oxford Economics is more pessimistic. It reduced its first-quarter growth prediction to 0.6% from 1% with some spillover into the second quarter. At the same time, the virus outbreak occurs against a backdrop of what is mostly a healthy U.S. economy. U.S. employers boosted payrolls by a higher-than-expected 225,000 in January as wage gains also rebounded.
The global outlook also appears a bit brighter now thanks in part to the US-China phase one trade deal and fading of fears of a disruptive, no-deal Brexit. What’s more, the turbulence in the money markets has also subsided, thanks to hundreds of billions of dollars the Fed pumped into the financial system.
So, Powell will have a lot to discuss. In a Feb. 6 letter Democrat senators pressed him for an explanation of what lay behind last year’s agitation in the money markets and the Fed’s response. The lawmakers, including presidential candidate Elizabeth Warren, raised questions about whether the banks had gamed the market in hopes of winning some regulatory relief.
Powell, for his part, has depicted the money market interventions as a success.
He also sounded satisfied with the stance of monetary policy, after three interest rate cuts last year. And he’s suggested that he’s likely to stay that way unless there’s a material change to the outlook for the U.S. economy.
So, we will see. Whether the coronavirus will eventually force such a reassessment is unclear at this point even as it broadened “the set of possible outcomes,” said Nathan Sheets, a former Fed official who is now chief economist for PGIM Fixed Income. And, it means that producers should watch the upcoming monetary debates especially closely as they emerge, Washington Insider believes.
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