WASHINGTON — As an uptick in the number of coronavirus infections outside China sent markets swooning on Monday, attention quickly turned to how the Federal Reserve and the United States government would assess — and potentially address — the economic fallout.
The Fed cut interest rates three times in 2019 to insulate the economy against uncertainty stemming from President Trump’s trade war and slowing global growth. Central bank officials have been clear that they expect to leave interest rates unchanged unless inflation jumps and stays higher — potentially causing them to lift rates — or risks increase and upend their outlook for stable growth, prompting them to cut.
The question now is whether the new coronavirus represents such a threat. Fed officials have been unwilling to declare it a reason to move yet: But as they strike a wait-and-see pose, markets are increasingly betting that global economic and market fallout from the disease will push the central bank to lower borrowing costs.
Markets on Monday had priced in a 75 percent chance of a rate cut as of the Fed’s June meeting, based on a CME Group tracker. The chance of a move that soon was priced at less than 50 percent a week ago.
The outbreaks in Italy and South Korea suggest that the virus “may be on the brink of morphing into a global pandemic,” Krishna Guha at Evercore ISI wrote in a note to clients, announcing that he and his colleagues had raised their estimate of a Fed rate cut this year to 45 percent.
“A global pandemic would likely have persistent impacts on global demand as well as lengthy effects on supply chains and trade” and “may well call for a monetary policy response,” the note said.
The Fed may have limited ability to counteract global economic fallout from the coronavirus, since its tools work to stoke demand — if factories are not producing goods and supply chains are disrupted by quarantines, cutting rates may do little to help.
“It’s hard to try to figure out how to be pre-emptive in a set of issues that have to do with health issues, but which then may go into supply chains,” Roger Ferguson, a former Fed vice chairman who is now the chief executive at TIAA, told reporters in Washington on Monday. “This one feels to me like one to watch, see and then decide if your tool is the right tool.”
Fed officials have also been cautious in characterizing the coronavirus as a threat because it has been unclear how fast and how far it might spread.
There is huge uncertainty surrounding the virus’s trajectory. Goldman Sachs economists expect the spread of coronavirus to slow sharply by the end of March and anticipate that supply chain disruptions will be “negligible” if things return to normal quickly. But they wrote in a note on Sunday that things could play out very differently if infections do not slow.
Risks are “heavily skewed to the downside should Chinese activity continue to be depressed for longer,” they wrote. “The impact might also become much larger if the coronavirus outbreak spreads quickly and slows down activity in other countries, disrupting supply chains further.”
Even without a big supply chain hit, Goldman Sachs’s trackers indicate that Chinese travel and economic activity are picking up more slowly than the analysts had initially expected. They now expect first-quarter gross domestic product growth in the United States to slump to 1.2 percent on an annualized basis before rebounding to 2.7 percent in the second quarter.
That temporary hit will come as tourism spending in the United States from Chinese visitors falls by two-thirds, and as Chinese demand for American exports slumps.
The real issue for the Fed, and for other economic policymakers, is the possibility that the virus might not be short-lived.
“The question for us really is: What will be the effects on the U.S. economy? Will they be persistent? Will they be material?” Jerome H. Powell, the Fed chair, told lawmakers while testifying before a congressional committee this month.
Some officials have sounded complacent about the chances of lasting fallout. James Bullard, the president of the Federal Reserve Bank of St. Louis, said in a CNBC interview on Friday that “there’s a high probability that the coronavirus will blow over.” He added that “there’s a low probability that this could get much worse” and that market pricing can reflect that.
Those comments came before reports later on Friday and over the weekend showed coronavirus cases climbing outside China. The virus has now infected more than 79,000 people in China and 32 other countries.
“The odds of Fed cuts are growing a lot,” Roberto Perli of Cornerstone Macro wrote in a note Monday. “But we need to understand that monetary policy is not well equipped to help in the situation we are facing.”
Fed officials are not alone in avoiding big declarations of concern: Administration leaders and other economic officials have been cautious in declaring the disease a major source of concern, in large part because its path remains highly uncertain.
The coronavirus is “something we’re tracking carefully,” Phillip Swagel, the director of the Congressional Budget Office, said Monday morning at an event in Washington, but said he did not have much else to add on the topic.
Tomas Philipson, the acting chairman of the White House Council of Economic Advisers, said at the National Association for Business Economists conference in Washington that the Chinese shutdowns would have some economic effect in the United States but that it is too early to tell how significant that would be.
“We don’t know yet. We’re sort of taking a wait-and-see approach,” he said, also noting that the scale of seasonal influenza is much more significant and that “in terms of the public health impact on the economy, I think that’s been exaggerated.”
The virus was a big topic of discussion at the Group of 20 finance ministers meeting in Riyadh over the weekend, where Treasury Secretary Steven Mnuchin advocated a wait-and-see approach.
“It’s tough to have strong predictions on the economic issues without being able to predict the health outcome,” he said during an interview with CNBC on Sunday. “So I think we need another three or four weeks to see how the virus reacts until we really have good statistical data.”
Alan Rappeport contributed reporting from Riyadh, Saudi Arabia.