Federal Reserve Board chair Jerome Powell testifies before the House financial services committee on Capitol Hill in Washington, DC, the US, February 11 2020. Picture: MANDEL NGAN / AFP
Federal Reserve Board chair Jerome Powell testifies before the House financial services committee on Capitol Hill in Washington, DC, the US, February 11 2020. Picture: MANDEL NGAN / AFP

Washington — Federal Reserve chair  Jerome Powell said on Tuesday the US central bank is keeping a close eye on fallout from the deadly coronavirus outbreak in China, singling it out among risks threatening the US 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 US legislators on Tuesday.

Powell stopped short of saying the outbreak had changed the Fed’s baseline outlook for the US economy, or the expectation among many members of the federal open market committee  (FOMC) that rates will remain on hold in 2020. US equities climbed as investors digested the latest views from the Fed chair and Treasuries slipped.

Monetary policy ‘appropriate’

“The FOMC believes that the current stance of monetary policy will support continued economic growth, a strong labour 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-ever quarantine effort and slowed large portions of China’s economy, disrupting travel and commerce worldwide.

Powell faced questions from legislators of the House financial services committee about the potential impact of the virus on the US economy.

“We know that there will be some, very likely be some effects on the US,” he said, adding that the question for the Fed is whether they will be “persistent” and “material”. “It’s just too early to say.”

The Fed chief is also scheduled for a hearing before the Senate banking committee on Wednesday as part of his semi-annual testimony to Congress.

Fed officials have dialled up their concern over the coronavirus in public remarks in recent days. Vice-chair Richard Clarida called it a “wild card” on January 31. The Fed’s semi-annual monetary policy report, released on February 7, said it was a “new risk” that could potentially interfere with trade, depress commodity prices and cause the US dollar to appreciate.

Some private sector economists have been less cautious, marking down their estimates for first-quarter growth in the US, while investors are betting the Fed will respond with an interest-rate cut later this year.

Labour market

In his prepared remarks, Powell provided a mostly positive picture of the US 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 labour market strengthened further, as the economy appeared resilient to the global headwinds that had intensified last summer,” he said.

His comments followed data released past week showing US employers added a better-than-expected 225,000 new jobs in January.

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.

Repo operations

The central bank has conducted emergency lending into the market for repurchase agreements and, in October, began purchasing $60bn 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 towards 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.”

Powell repeated his concerns over longer-term issues holding back growth in the US economy.

“Finding ways to boost labour force participation and productivity growth would benefit Americans and should remain a national priority,” he said.

Federal budget

He also warned legislators that 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 criticised Powell for not lowering interest rates further.

The coronavirus, named COVID-19 on Tuesday, 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 2019, 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 first phase of the China trade deal, Britain’s avoidance of a sudden, no-deal exit from the EU  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 about trade have diminished recently, but risks to the outlook remain,” Powell said.