The Federal Reserve slashed interest rates by half a percentage point in an attempt to give the U.S. economy “a jolt” in the face of concerns about the outbreak.
In response, the markets which had anticipated interventions as early as Monday, continued mixed and moved lower on Tuesday in spite of the rate cut – the first unscheduled, emergency cut since 2008, and the biggest one-time cut since then. The new benchmark interest rate is 1% to 1.25%.
To nobody’s surprise, President Donald Trump, who has long advocated lower rates, cheered the cut but called it “too small” and said the Fed needed to cut further.
The market is also expecting future cuts, as early as the April Fed meeting, according to the CME FedWatch Tool. Chances that rates will be lowered by another quarter-percentage point next month were at around 50% after the cut announced Tuesday morning.
"With financial markets in turmoil and evidence growing that the virus is developing into a pandemic, the Fed's recent change of heart is entirely understandable," wrote Paul Ashworth, chief U.S. economist at Capital Economics.
But the emergency cut also signals that the outlook for the U.S. economy might have been in more jeopardy than previously thought, the report said. The U.S. stock market struggled for direction as it balanced the economic stimulus of the rate cut with the statement the rate cut makes about the economy.
On Monday, the Organization for Economic Cooperation and Development warned that global growth could be cut in half if the outbreak continues to spread. Many of the world's biggest companies, including Apple and Microsoft, have recently issued profit and sales warnings reflecting travel restrictions, factory closures and supply chain issues. Economists are also wondering how consumer behavior will change because of the outbreak, especially since consumers play such an important role in the U.S. economy.
On Tuesday, Bloomberg released a more detailed description of coronavirus impacts on important upcoming economic indicators. The report used historical events as a starting point, from the SARS and MERS epidemics to natural disasters in the U.S. and Japan. In all cases, business conditions took months to return to normal, so even if the coronavirus is contained soon, it is likely to reverberate through data for some time.
The report listed several “top indicators” to watch. These include jobless claims and notes that filings for unemployment are typically the first broad distress signal when the economy gets bruised. Claims have been hovering near a half-century low for the past year, but could rise as soon as Thursday’s weekly report, according to Gus Faucher, chief economist at PNC Financial Services Group.
If businesses see sustained virus impacts, “they may start adjusting their payrolls now,” said Ryan Sweet, head of monetary policy research at Moody’s Analytics. At the same time, it’s unclear if any employment changes will be big enough to show up in claims already according to Bank of America Corp.’s Michelle Meyer.
Several firms have canceled conferences in the U.S., Bloomberg said, and restrictions on travel into the country – particularly from China – are likely to affect the data. Chinese tourists are the fifth-largest group to visit the U.S., with about 3 million visiting in 2018, Bloomberg said.
The report also focuses on international trade and notes that preliminary figures already show declines in shipments in January, though some recovery was expected after the phase one deal was signed early this year. But shortly after that signing, Chinese officials began to seek flexibility on their pledges as the virus threatened the Asian nation’s economy.
On Monday, a gauge of U.S. manufacturers’ imports plummeted to the lowest level since 2009 while another index reflected supply-chain disruptions. Look for trade impacts to also show in capital-goods orders and shipments, as well as greater volatility of import and export prices.
While American consumers aren't yet rattled by two months of coronavirus headlines, Bloomberg expects that coming surveys, including its Comfort Index due Thursday, will more fully reflect reactions to the stock market plunge. In addition, consumers now must confront more U.S. outbreaks and warnings from agencies such as the CDC.
Bloomberg also warns that the March report on retail sales may be disappointing, especially since consumer spending accounts for the majority of the economy and has driven growth for several quarters amid weakness in business investment.
In addition, the Federal Reserve data later this month will give a more detailed view of how the virus rippled through U.S. factories in February. With orders weakening and supply chains gummed up, companies may be pausing investment to gauge consumer demand and clarity on the coronavirus fallout for the broader economy.
Will these downward expectations come true? We will see. Clearly, the economic impacts of the outbreak are expected to be negative and significant, but the major government financial institutions around the globe appear to be committed to take significant steps to provide economic supports. The key questions now include how severe the outbreak will turn out to be and how effective governments’ efforts to provide protections turn out to be, developments producers should watch closely as they proceed, Washington Insider believes.
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