Published: Thu, February 27, 2020
Markets | By Otis Pena

Fed’s Richard Clarida Says It’s Too Soon to Speculate on Virus Spillover

Fed’s Richard Clarida Says It’s Too Soon to Speculate on Virus Spillover

Markets and global events are giving central bankers a case of déjà vu.

US investors have brought forward their bets on when the Fed will next cut interest rates, to April of this year. Now, the potential for a global coronavirus outbreak is again putting the Fed in a delicate spot.

Washington―The trade conflict of the past two years likely left a mark on the USA economy, even with the recent agreement to defuse the situation, a Federal Reserve official said Monday.

Cleveland Federal Reserve President Loretta Mester (L) talks with host Maria Bartiromo on The Fox Business Network on April 1, 2016 in NY.

World markets are in a tailspin as infections unfold shortly past China. European shares suffered their biggest drop since mid-2016 on Monday and oil plunged nearly 5% on the news of a jump in coronavirus cases in Italy, South Korea, Japan and Iran.

USA interest rate futures surged to their highest levels since last fall as evidence the virus was spreading further outside its original epicenter of China spurred a global sell-off in stocks and panicked buying of government bonds. The Fed likely won't be able to "escape" cutting rates at some point in coming months so it may be "tactically prudent" for investors to take advantage of any occasions when front-end rates rise, they wrote.

China virus cases drop as foreign fears rise
And four people have now died of the coronavirus in Iran , where health authorities say it has spread to multiple cities. Four deaths in such a short period raises concerns that there's a wider number of infections in Iran.

A substantial decline this year in long-term yields means borrowing costs have already grown more favorable.

The Fed's economic dashboard to decide the course of interest rates includes financial market cues.

Top U.S. central bank officials have signaled repeatedly that they see no need to cut rates further any time soon because they see the American economy performing well and it is too soon to judge the risk from coronavirus.

Minneapolis Fed President Neel Kashkari said it was too soon to say how the Fed might respond, even though he judged the Fed's next move was more likely to be a cut than an increase. "At this point, it is hard to assess the magnitude of the economic effects, but this new source of uncertainty is something I will be carefully monitoring", she said of the epidemic. "Based on everything that we know, and where the virus is now, I don't expect that it's going to be material", Mnuchin said. In late morning inter-bank trading the shekel exchange rate was up 0.33% against the dollar at NIS 3.440/$ and up 0.85% against the euro at NIS 3.747/€, Trend reports with reference to Globes.

Fed officials have demonstrated a willingness over the past year to ease policy to defuse looming economic threats.

USA money market futures now fully price in a 0.25 percentage point cut by the end of June, compared to about 50% chance a week ago.

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