Virus fears blunt strong jobs data; Williams says Fed vigilant, Trump wants rate cuts

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Strong employment data and reassuring words from a Federal Reserve official couldn’t stop financial markets from caving under the weight of investor fears about the spreading COVID-19 virus. President Donald Trump weighed in by urging the Fed to cut rates again.

Non-farm payrolls rose 273,000 in February while the unemployment rate dipped to 3.5% from 3.6%, the Labor Department reported on Friday. Economists surveyed by IFR Markets had expected a gain of 175,000 jobs in February with the employment rate remaining steady at 3.6%.

Job gains were seen in the areas of healthcare and social assistance, food services and drinking places, government, construction, professional and technical services, and financial activities.

“Another strong jobs report underscores the resilience of the U.S. services sector — which accounts for the lion’s share of employment — at least until February,” said from Brian Coulton, chief economist at Fitch Ratings. “The fallout from China’s sharp downturn and the changes in U.S. firms and households behavior in response to the COVID-19 outbreak — including reduced travel — will doubtless take a toll on service sector and broader U.S. economic activity from March. But it comes against the backdrop of steady growth in the non-manufacturing sector and a tight labor market, supporting consumption.”

John Williams, Federal Reserve Bank of New York President, said the Fed has taken appropriate steps so far with regard to COVID-19 and would continue to closely watch the evolving situation.
The Federal Open Market Committee lowered the target range for the federal funds rate by 1/2 point to a range of 1% to 1 1/4% on Tuesday. The Fed said it took the action in response to the risks the coronavirus could pose to the U.S. economy.

“This strong policy action provides meaningful support to the economy and will help sustain the economic expansion. The outlook is evolving and highly uncertain,” Williams said in remarks prepared for delivery at the Foreign Policy Association in New York City on Thursday night. “In the weeks and months ahead, we will continue to closely monitor developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

He said, however, that the economy remains strong.

“Let me emphasize that the fundamentals of the U.S. economy remain strong. We’ve seen continued solid job growth, unemployment is at a historically low level, and we entered 2020 with very good momentum,” Williams said.

He added, however, the outbreak and spread of the virus has brought new risks to the economic outlook.

“The virus and the necessary scale of the response to address the public health challenge will have near-term effects on the global economy,” he said. “We are now also hearing reports that some businesses here in the United States are being affected by supply disruptions and weakening demand. As people take precautions, we’re seeing concerns around the tourism and travel sectors, in particular.”

He said the Fed was coordinating with counterparts around the world, with central banks and G7 finance ministers.

“The coronavirus poses evolving risks to the U.S. economy. Our policy action this week positions us well to support the economic expansion. We are carefully monitoring the effects of the coronavirus on the U.S. economic outlook and will respond as appropriate,” Williams said.

On Friday, President Donald Trump signed a bill into law that provides $8.3 billion in funds to fight COVID-19.
When asked if stimulus was needed, the president said it would be up to the Fed to move, but that he wanted them to do it.

“I think what happens is the Fed should cut and the Fed should stimulate. And they should do that because other countries are doing it, and it puts us at a competitive disadvantage. And we have the most prime. We are considered by far the most prime. And it's our dollar that everybody uses. The Fed should stimulate and the Fed — they should cut.

“And why should Germany have an advantage over us with interest rates? So Germany — you know, Germany, just announced that they’re stimulating and they're cutting. Asia is. All over Asia they are. China is. China is tremendously.

“And we're really not. And we pay higher interest; we have a higher rate. And it's ridiculous, frankly. We should have the lowest rate by far, and instead we pay more than other countries. Other countries are paying zero and less than zero. You know it very well. And we're paying interest, which is a very conservative approach, but it's not a good approach because we're also competing against other countries, whether we like it or not.”

Scott Anderson, chief economist at Bank of the West, said the virus was itself a serious threat to the U.S. and global economic expansion, but the shock that it is creating was "starting to touch off financial market contagion and volatility the likes he haven’t seen since the global financial crisis of 2007 and 2008."

He said that fed funds futures were pricing in Fed rate cuts all the way to the lower bound by the end of the year with an implied yield of 0.195%.

"Our Fed forecast is that we will see another 25 basis point cut from the Fed at their April meeting and another 25 basis point cut at their June meeting," he said in a market note. "I think today’s employment report was too strong for the Fed to cut again at the March FOMC meeting, given they just did 50 basis points in cuts this week. Moreover, if the U.S. economic indicators for March and April show growing evidence a contraction is underway or imminent, the Fed will not hesitate to move the fed funds rate to their lower bound of between zero and 25 basis points before year end."

Trade deficit declines
The U.S. international trade deficit decreased to $45.3 billion in January from a revised $48.6 billion in December, originally reported at $48.9 billion, the Commerce Department reported on Friday.

Economists polled by IFR Markets had expected a deficit of $47.7 billion in January.

Imports decreased more than exports in January.

The goods deficit decreased $2.6 billion in January to $67.0 billion while the services surplus increased $600 million to $21.7 billion.

Wholesale inventories drop
Wholesale inventories fell 0.4% to $671.6 billion in January, the Commerce Department reported.

Total inventories were up 0.4%, however from the January 2019 level.

Economists surveyed by IFR Markets had expected a 0.2% drop in inventories

Wholesale sales rose 1.6% to $504.6 billion and were up 2.2% from the January 2019 level.

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