Fed ‘closely monitoring’ risk from coronavirus outbreak: Powell

Federal Reserve chairman Jay Powell said the central bank was “closely monitoring” the risks to the US economy from the coronavirus outbreak in China that has threatened to dampen growth around the world. 

“Risks to the outlook remain,” Mr Powell told the House financial services committee on Tuesday. “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.”

“We know that there will be very likely some effects on the United States,” he told lawmakers, adding that it was too early to say what those effects would be.

“The question we’ll be asking is: Will these be persistent effects that could lead to a material reassessment of the outlook?” Mr Powell said. The Fed chair has previously said that the Fed would not raise its policy rate unless it had a reason for a “material reassessment of the US economy.”

In the UK, Mark Carney, the Bank of England governor, told lawmakers that while it was too early to assess the impact of the coronavirus outbreak on global growth, it had not yet led to any tightening in financial conditions and UK banks were in a position to withstand a much bigger shock to China’s economy.

The BoE’s latest stress tests modelled the effects of a fall of 1.5 per cent in Chinese gross domestic product and 2.5 per cent in Hong Kong’s output, he said, showing the spillover effects on the UK’s financial system would be containable even with a shock “orders of magnitude” greater than that seen so far.

“It’s still very, very early days. This is, from an economic perspective, already bigger than Sars,” he told the House of Lords Economic Affairs Committee, adding that previous experience of pandemics suggested that much of the output lost could be recovered later.

The Fed had previously flagged the possibility that the outbreak in China could have an effect on the US in its monetary policy report to Congress, released last Friday. When it last met at the end of January, the Fed confirmed its intention to leave its main policy rate where it was, at 1.5 to 1.75 per cent, through the end of 2020.

Over the longer term, Mr Powell pointed Congress to the ongoing challenges of keeping workers in the labour force and making them more productive. He also said lawmakers might have to help stabilise growth through spending if a downturn occurs. 

Mr Powell said that even though labour force participation had recovered from its lows after the global financial crisis, it remained lower than in most other developed economies.

“Although it is encouraging that productivity growth, the main engine for raising wages and living standards over the longer term, has moved up recently, productivity gains have been subpar throughout this economic expansion,” he said. “Finding ways to boost labour force participation and productivity growth would benefit Americans and should remain a national priority.”

In January, two former Fed chairs, Janet Yellen and Ben Bernanke, said it was possible the Federal Reserve would not be able to cushion the next downturn on its own, and urged Congress to consider stronger fiscal stabilisers, such as unemployment insurance, that would kick in automatically.

Mr Powell added his voice to that chorus on Tuesday, saying that with interest rates already low, “it would be important for fiscal policy to help support the economy if it weakens.”

US President Donald Trump renewed his attack on Mr Powell during the chairman’s testimony, commenting on US equity markets, which touched record highs on Tuesday.

“When Jay Powell started his testimony today, the Dow was up 125, & heading higher. As he spoke it drifted steadily downward, as usual, and is now at -15” he wrote on Twitter. “Germany & other countries get paid to borrow money. We are more prime, but Fed Rate is too high, Dollar tough on exports.”

Mr Trump has long pushed for the US to adopt negative interest rates like Japan and many other European countries have in recent years, to boost growth.

During his testimony, Mr Powell pushed back on the idea. “That is not a tool we are looking at,” he said, noting there is evidence that negative rates hurt banks and credit creation. “Going forward, our inclination would be to rely on the tools we did use, as opposed to negative rates.”

Additional reporting by Delphine Strauss in London