By Lindsay Dunsmuir
WASHINGTON (Reuters) – U.S. Federal Reserve policymakers have already begun responding to the coronavirus with an emergency interest rate cut and a reopening of their crisis tool kit, all without a clear idea of what damage is being done outside of plummeting financial markets.
In addition to likely cutting rates further when they gather on Tuesday and Wednesday for their next scheduled meeting, they will have to offer their own best estimates of the outbreak’s economic fallout.
That’s because every quarter policymakers have to give individual forecasts for economic growth, the unemployment rate, inflation and interest rates for the end of the year in progress as well as for the next two or three years and the longer term.
Next week’s projections will give insight into whether any policymakers foresee a recession, and if so, how deep and how long it might be. The range of forecasts, which are anonymous, will offer clues on how divided policymakers are.
“I think the most important thing will be the dispersion of views,” said Torsten Slok, chief economist at Deutsche Bank Securities. “Is this a Fed where there is broad agreement?”
The central bank slashed interest rates by half a percentage point to a target range of between 1% and 1.25% in an emergency move just over a week ago as fears about the prospect of a global recession caused by the coronavirus pandemic caused stock markets to drop sharply.
On Thursday, it dramatically ramped up the liquidity it has been providing to the banking sector and changed the composition of its monthly bond purchases to resemble the ambitious asset purchase program it first rolled out to combat the financial crisis more than a decade ago.
At the conclusion of next week’s meeting – if not before – the Fed is seen announcing a further reduction in borrowing costs by as much as three quarters of a percentage point, with financial markets predicting the Fed will be forced to cut to zero by April to boost the economy.
DEEP UNCERTAINTY
The breakneck speed with which the coronavirus outbreak has altered business and government decisions that could impact the U.S. economy, as well as deep uncertainty about how severe and long-lasting the effects will be, make the forecasts more difficult than usual. On Wednesday, President Donald Trump imposed sweeping restrictions on travel from Europe.
“A situation like this, they don’t have a basis. What kind of assumptions will condition the forecast?” said Roberto Perli, an economist at Cornerstone Macro. “You don’t know exactly how it will play out.”
So far, the most-watched economic indicators have yet to deteriorate, but if the United States is forced to impose more severe measures to slow down the spread of the virus, that could quickly change. Fear can also play a large part in dampening consumer spending – the main engine of U.S. economic growth – if the public is too scared to go out.
The virus is already reducing demand for transportation, especially air travel, as well as entertainment and recreation, and leisure and hospitality services.
Economists expect policymakers to make cuts to their forecasts, but will be looking to see if they expect the impact on economic growth to be concentrated in the first half of the year with a rebound in the second half.
Complicating matters further could be the recent hit to the U.S. energy sector, which is now a net exporter. Crude prices have plunged, a drop that has been exacerbated by an oil price war between Saudi Arabia and Russia. That could cause a further downturn in business investment, which has been negative for three straight quarters.
“Usually what would offset that are consumers,” said Beth Ann Bovino, U.S. chief economist at S&P Global. “I do expect they can’t ignore that many parts of the United States are in shutdown mode.”
(Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci)
