Federal Reserve Chairman Jerome Powell plans to tell Congress Wednesday that Fed officials aim to hold interest rates steady barring a “material” change in their outlook, though he added they’re “closely monitoring” the coronavirus for disruptions “that could spill over to the rest of the global economy.”
The Fed cut its benchmark federal funds rate three times last year during the Trump administration’s trade war with China and as global growth turned sluggish. But the outlook brightened somewhat late last year.
“With some uncertainties surrounding trade having diminished and amid some signs that global growth may be stabilizing, the (Fed) left policy rate unchanged,” Powell said in prepared testimony he plans to deliver at 10 a.m. before the House Financial Services Committee.
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He added, however, “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.”
In its monetary policy report to Congress, the Fed used somewhat stronger language, saying that “possible spillover effects of the coronavirus…have presented a new risk to the outlook.”
Since the Fed’s last meeting in January, the number of coronavirus cases has surged to nearly 41,000 worldwide and the death toll has surpassed 1,000, with most of the infections in China. There have been 12 cases in the U.S.
Moody’s Analytics now expects the virus to shave nearly half a percentage point off U.S. economic growth in the first quarter by severely curtailing tourism from China, reducing U.S. exports to the country and generating uncertainty that hurts stock and bond markets. The halt to Boeing’s production of its 737 MAX airliner after two fatal crashes is expected to trim another half percentage point off growth.
Yet even with that nearly percentage point reduction, economists predict growth of about 2% in the current quarter and just under 2% for all of 2020.
In his prepared testimony, Powell said that “over the second half of last year, economic activity increased at a moderate pace and the labor market strengthened further, as the economy appeared resilient to the global headwinds that had intensified last summer.”
He added that job gains have been solid, averaging 200,000 a month during that period, and the economy has grown moderately, bolstered by consumer spending.
Powell also reiterated his plea to Congress to put the federal budget “on a sustainable path” so money is available to boost growth during a downturn.
A federal deficit of about $1 trillion is projected over the next decade, partly as a result of tax cuts and spending increases passed by Congress and spearheaded by President Trump.