U.S. current monetary policy appropriate despite COVID-19 threat: Fed official

Darnell Taylor
February 27, 2020

The U.S. dollar weakened on Tuesday as expectations grew that the Federal Reserve would cut interest rates this year to relieve pressure on the economy caused by China's coronavirus outbreak.

Clarida believed that US monetary policy is "in a good place" and should continue to support sustained growth, a strong labor market, and inflation returning to the central bank's target of 2 percent.

Mester, a voting member of the Fed's interest rate-setting committee this year, was relatively upbeat about the economy, which she said should continue to perform well with a strong job market and growth of about 2 percent, slightly slower than last year.

Cleveland Federal Reserve Bank President Loretta Mester said on Monday that the USA economy should continue to perform well this year and monetary policy is now well-positioned. "I think our policy is well-calibrated to where we are ... including the risks that are out there".

Following his speech, Clarida also downplayed the notion the Fed would readily react to the stock market drop.

S&P 500 Volatility Index, or VIX, on February 25, 2020.

Wall Street recorded its biggest sell-off in two years.

Among the challenges facing the Fed: With its benchmark rate between 1.5% and 1.75%, the central bank has less room to stimulate growth by cutting rates, which are already historically low.

A key issue is how the coronavirus impacts the economy.

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Gregory Daco, an economist at Oxford Economics, said the Fed should move quickly to avoid falling behind the curve.

The Fed Fund Futures Market pricing a 31% probability of a 75-100 basis point by December 16, 2020.

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The coronavirus has led to significant quarantines in China since January, initially focusing attention on how much a hit the global economy might take from idled production in the world's second largest economy. The Aussie final purchased $0.6616, a 3rd of a cent greater than the 11-year low hit on Monday.

China has been focused on the virus for now, he said, but Washington still expects Beijing to live up to its commitments to buy more USA products and services under the trade deal.

Virtually 2,700 individuals have died in China and its financial system has been paralysed by lockdown measures imposed to attempt to halt the virus' unfold.

That's the view of BMO Capital Markets' Jon Hill and Ben Jeffery, who said that, since the 1980s, front-end markets have nearly never priced in cuts to this extent without the Fed following through.

And consumers won't necessarily spend more, even with lower rates, if they are waiting to see how the viral outbreak progresses, or if they are staying home out of fear.

The impact of interest rates were more noticeable in the fourth quarter.

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