Fed’s Richard Clarida says it’s too soon to speculate on virus spillover

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It is “still too soon” to say whether the coronavirus outbreak will cause a material change in the U.S. outlook, said Federal Reserve Vice Chairman Richard Clarida, signaling officials won’t be rushed to judgment on the need to cut interest rates.

“Monetary policy is in a good place and should continue to support sustained growth, a strong labor market, and inflation returning to our symmetric 2% objective,” Clarida told the National Association for Business Economics in Washington on Tuesday. “As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate.”

Federal Reserve Vice Chairman Richard Clarida
Federal Reserve Vice Chairman Richard Clarida

The Fed’s No. 2 said the virus is likely to have a “noticeable impact” on Chinese growth at least in the first quarter. “The disruption there could spill over to the rest of the global economy. But it is still too soon to even speculate about either the size or the persistence of these effects, or whether they will lead to a material change in the outlook.”

He later noted that Chinese first quarter data won’t be available until April.

U.S. policy makers are about three weeks away from their next meeting where they will publish new economic forecasts for 2020 and the next two years. Fed officials are trying to gauge the impact of the coronavirus outbreak on the U.S., which has prompted some private-sector economists to lower their first-quarter economic growth estimates. Investors are fully pricing in the probability of a quarter-point cut in the benchmark lending rate by June.

Nothing in Clarida’s remarks suggest the Fed is ready to move.

“It is too hard to know what the impact is going to be,” said Tom Simons, senior economist at Jefferies LLC in New York. “By June, it is possible that we might have some more information that the Fed may act on.”

The virus, which emerged in China late last year, has spread to nations including Italy, Iran, and South Korea. Worldwide deaths from the illness total 2,462, according to the Centers for Disease Control and Prevention, and mainland cases in China total 76,936, even though they have quarantined 50 million people in more than a dozen cities.

Worries about a global economic slowdown resulting from travel, supply chain, and consumption disruptions provoked the worst stock market sell-off in two years on Monday with the Standard & Poor’s 500 stock index now down 7.6% in four days. Investors continued to rush into U.S. government debt, with yields on 10-year Treasuries falling to a record low. Still, the U.S. economy started the year on a strong footing. Non-farm payrolls rose by 225,000 jobs in January, while low interest rates are supporting housing activity.

Clarida indicated that the labor market still had slack which should allow for continued hiring before wage pressures start to emerge. The participation rate of prime-age workers, or those aged 25 to 54, have “room to run,” he said in a question-and-answer period.

The Fed vice chairman said officials would need to see “a significant and persistent rise in inflation above 2%” to be persuaded that rates needed to go higher. And even then if inflation is a symmetric goal “you’ve got to spend some time above as well as below. If you’re always at or below 2 that’s not a symmetric goal,” he said.

“The U.S. economy is in a good place,” Clarida said. The Federal Open Market Committee “will proceed on a meeting-by-meeting basis and will be monitoring the effects of our recent policy actions along with other information bearing on the outlook as we assess the appropriate path of the target range for the federal funds rate.”

Bloomberg News