Powell Says Risks to Outlook Remain, Fed Monitoring Virus
Powell stopped short of saying the outbreak had changed the Fed’s baseline outlook for the U.S. economy.
(Bloomberg) -- Federal Reserve Chairman Jerome Powell said the U.S. central bank is keeping a close eye on fallout from the deadly coronavirus outbreak in China, singling it out among risks threatening the U.S. and world economy.
“In particular, 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 remarks before U.S. lawmakers Tuesday.
Powell stopped short of saying the outbreak had changed the Fed’s baseline outlook for the U.S. economy, or the expectation among many members of the Federal Open Market Committee that rates will remain on hold this year. U.S. equities climbed as investors digested the latest views from the Fed chair and Treasuries slipped.
“The FOMC believes that the current stance of monetary policy will support continued economic growth, a strong labor market and inflation returning to the committee’s symmetric 2% objective,” Powell said. “As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy will likely remain appropriate.”
Coronavirus, which has killed more than 1,000 people, has prompted the world’s largest-known quarantine effort and slowed large portions of China’s economy, disrupting travel and commerce worldwide.
Powell faced questions from lawmakers of the House Financial Services Committee about the potential impact of the virus on the U.S. economy.
“We know that there will be some, very likely be some effects on the United States,” he said, adding that the question for the Fed is whether they’ll be “persistent” and “material.”
“It’s just too early to say,” Powell said.
The Fed chief also responded to lawmakers on a range of issues including volatility in money markets, Libor, minimum wages, digital currency and community banking. He’s scheduled for a separate hearing before the Senate Banking Committee at 10 a.m. Wednesday as part of his semi-annual testimony to Congress.
Fed officials have dialed up their concern over the coronavirus in public remarks in recent days. Vice Chairman Richard Clarida called it a “wild card” on Jan. 31. The Fed’s Semiannual Monetary Policy Report, released Feb. 7, said it was a “new risk” that could potentially interfere with trade, depress commodity prices and cause the U.S. dollar to appreciate.
Some private-sector economists have been less cautious, marking down their estimates for first-quarter growth in the U.S., while investors are betting the Fed will respond with an interest rate cut later this year.
Labor Market
In his remarks and testimony, Powell provided a mostly positive picture of the U.S. economy -- which was dented but not significantly damaged by slower global growth and international trade disputes in 2019.
“Economic activity increased at a moderate pace and the labor market strengthened further, as the economy appeared resilient to the global headwinds that had intensified last summer,” he said.
“There’s nothing about this expansion that is unstable or unsustainable,” Powell said in response to a question about what could disrupt current economic strength. His comments followed data released last week showing U.S. employers added a better-than-expected 225,000 new jobs in January.
Repo Operations
Powell said the central bank had been successful in containing a sudden September spike in overnight funding rates that briefly pushed the Fed’s benchmark lending rate to stray outside its target range.
The central bank has conducted emergency lending into the market for repurchase agreements and, in October, began purchasing $60 billion a month in Treasury bills. The latter move has boosted bank reserves, allowing banks to feed money into the repo market in place of the Fed.
“As our bill purchases continue to build reserves toward levels that maintain ample conditions, we intend to gradually transition away from the active use of repo operations,” he said. “We intend to slow our purchases to a pace that will allow our balance sheet to grow in line with trend demand for our liabilities.”
Read more: Fed’s Term Repo Action Oversubscribed for Third Time in Row
Powell repeated his concerns over longer-term issues holding back growth in the U.S. economy.
“Finding ways to boost labor force participation and productivity growth would benefit Americans and should remain a national priority,” he said.
Federal Budget
He also warned lawmakers the economy would need support from fiscal policy in the event of a downturn, and pressed them to put the federal budget on a sustainable path.
The White House on Monday released President Donald Trump’s proposed 2021 federal budget, which included deficit spending of about $1 trillion. Trump has repeatedly criticized Powell for not lowering interest rates further. The attacks resumed Tuesday during Powell’s appearance before Congress with a tweet calling the current interest rate too high and pointing to a dip in theDow Jones Industrial Average during the testimony. That index subsequently erased declines and the broader S&P 500 gauge of U.S. stocks maintained gains.
Coronavirus emerged as an economic threat in recent months just as the global outlook was beginning to brighten. Powell and his colleagues cut rates three times in 2019 to guard against the risks posed by trade tensions, slow global growth and below-target inflation. Since late last year, however, Fed officials have said monetary policy was in a good place and would remain unchanged unless their outlook for the economy changed materially.
Completion of the China phase-one trade deal, Britain’s avoidance of a sudden, no-deal exit from the European Union and a slight improvement in global manufacturing data pointed to a more stable outlook for 2020 after a decidedly rocky 2019.
“Some of the uncertainties around trade have diminished recently, but risks to the outlook remain,” Powell said.
--With assistance from Matthew Boesler, Steve Matthews and Ana Monteiro.
To contact the reporters on this story: Christopher Condon in Washington at ccondon4@bloomberg.net;Max Reyes in Washington at mreyes125@bloomberg.net
To contact the editor responsible for this story: Margaret Collins at mcollins45@bloomberg.net
©2020 Bloomberg L.P.