Bloomberg – Federal Reserve Bank of St. Louis President James Bullard said he would back interest-rate reductions if the coronavirus develops into a worldwide pandemic, but last year’s cuts are already supporting the economy.
“Further policy rate cuts are a possibility if a global pandemic actually develops with health effects approaching the scale of ordinary influenza, but this is not the baseline case at this time,” Bullard, who doesn’t vote on monetary policy this year, said Friday in prepared remarks to be delivered in Fort Smith, Arkansas.
Traders in money markets are starting to bet the Federal Reserve may be forced into an emergency interest-rate cut if the coronavirus gets much worse. The wagers are driving down benchmark yields in U.S. Treasuries to record lows. Traders are now pricing a 25-basis-point cut for the Fed at its meeting in March, with another one expected in June.
The S&P 500 plunged Friday as markets opened in New York and Treasury yields sank to fresh record lows.
Bullard, who has been among the most dovish of policy makers, has sometimes been a front-runner in signaling a monetary-policy shift, but he wasn’t ready on Friday to declare it as a necessity. The Federal Open Market Committee cut rates three times last year, which puts the Fed in a good position to insure against adverse shocks, he said.
“Longer-term U.S. interest rates have been driven lower by a global flight to safety, likely benefiting the U.S. economy,” he added.
Bullard said China’s growth will be hurt in the first quarter and while cases are growing at a slower rate there, new cases of the virus continue to rise elsewhere. U.S. companies will be affected that operate in China or produce supplies in the nation, he said.
“Temporary disruptions to global supply chains are likely to have ripple effects across the global economy,” he said.
While the risk remains small as of today, investors and policy makers are wise to worry about the possibility of a global pandemic, Bullard said.
“This is not what has happened with many other viral outbreaks, but each situation is somewhat different,” he said.
While other Fed officials this week have said it’s too early to know what economic impact the virus will have, markets have plunged in the U.S., Asia and Europe. The yield on 10-year Treasuries slid Friday to 1.15% before pulling back above 1.2%.
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