Fed Officials See Little Virus Impact and No Need to Alter Rates

(Bloomberg) -- While the coronavirus is reducing growth in China and throughout Asia, the impact to the U.S. economy should be short-lived and likely won’t require the Federal Reserve to lower interest rates, Fed officials said today.

“There’s a high probability that the coronavirus will blow over, as other viruses have, be a temporary shock and everything will come back,” Federal Reserve Bank of St. Louis President James Bullard said in a CNBC televised interview. On the same network, Atlanta Fed President Raphael Bostic said, “I think this is going to be a short-term hit. We’ll get the economy back to its usual level” after that passes.

The two officials, speaking in New York, echoed the view of the policy-making Federal Open Market Committee. Fed officials are closely monitoring the economic impact of the virus, which has emerged as a new risk to the global growth outlook, though they expect interest rates will remain unchanged for some time, according to minutes of the January meeting released on Wednesday.

Bullard agreed with the take of Fed Vice Chairman Richard Clarida, who said yesterday that most investors don’t expect the central bank to cut interest rates because of the continuing impact of the virus. Markets are pricing in a remote possibility of a long-term impact as well as the most likely outcome of little damage to the U.S., the St. Louis official said.

“The base case is that, as other viruses have dissipated, this one will also dissipate,” Bullard said. “If you think the virus is going to dissipate and we’re going to have a temporary shock and everything is going to go back to normal, yeah, I think the Fed is in great shape and we don’t have to lower rates in that scenario.”

Both Fed officials expressed confidence in the U.S. outlook this year, both citing forecasts of 2-2.25% growth and a strong labor market.

“The economy is pretty good,” Bostic said, adding he had “no impulses” to change interest rates. “Employment is going to continue to be strong. Inflation is not going to be a significant problem.”

Neither of the Fed officials vote on monetary policy this year. Bostic is scheduled to be among the speakers at the annual Chicago Booth School policy forum in New York today.

The epidemic in China has been tentatively contained but hasn’t reached a turning point yet, according to China Central Television, which cited a politburo meeting. Infections in China topped 75,000.

©2020 Bloomberg L.P.

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