St. Louis Fed's Bullard Discusses Coronavirus and the U.S. Economy

February 28, 2020

FORT SMITH, Ark. – Federal Reserve Bank of St. Louis President James Bullard presented “Coronavirus and the U.S. Economy” to the Fort Smith Regional Chamber of Commerce on Friday.

Bullard noted that coronavirus (COVID-19) cases appear to be stabilizing in China, with additional cases being reported globally. Global economic growth is likely to slow temporarily, with much of the slowdown centered in Asia, he explained.

Bullard noted during his presentation that the Federal Open Market Committee (FOMC) is in a good position because of previous policy rate cuts designed to insure the economy against adverse shocks. “Longer-term U.S. interest rates have been driven lower by a global flight to safety, likely benefiting the U.S. economy,” he added.

“Further policy rate cuts are a possibility if a global pandemic actually develops with health effects approaching the scale of ordinary influenza, but this is not the baseline case at this time,” he said.

Temporary Slowdown in Global Growth

The coronavirus is an “unfolding human tragedy,” and data related to the outbreak are fast moving and subject to revision, Bullard noted. He pointed out that confirmed cases in China seem to be growing at a slower rate and that other countries have reported new cases in recent days.

He noted that there is likely to be a noticeable impact on China’s first-quarter GDP growth due to the coronavirus. Other countries may also be impacted directly by the virus, but these effects will likely be on a smaller scale, Bullard added.

“Temporary disruptions to global supply chains are likely to have ripple effects across the global economy,” he said.

The FOMC Is in a Good Position

Bullard then discussed insurance policy rate cuts already in place: “The FOMC executed a marked turnaround in U.S. monetary policy during 2019 that was designed in part to insure the economy against possible negative shocks to growth.”

He added, “This has put the FOMC in a good position in early 2020 as we closely monitor the evolving coronavirus impact on the global economy.”

Policy rate decreases have an effect on the U.S. economy with a lag, Bullard noted, so last year’s rate reductions are likely to continue to have an influence as the coronavirus tragedy unfolds.

Bullard has previously argued that the adjustment to monetary policy during 2019 was much larger than commonly appreciated. He pointed out that the change in monetary policy contributed to a reduction of 165 basis points in the 2-year Treasury yield from Nov. 8, 2018, to Jan. 31, 2020.

Financial Market Impact

Bullard noted that the coronavirus also has been associated with a global flight to safety, pushing longer-term U.S. yields to exceptionally low levels. “This is a bullish factor for U.S. economic growth above and beyond the declines in yields associated with the 2019 change in direction for U.S. monetary policy,” he said.

“Experience with previous viral outbreaks suggests that the effects on U.S. interest rates are tangible and last until the outbreak is clearly contained,” he said.

Bullard also addressed the impact on equity markets, noting that U.S. equity valuations have declined in recent trading due in part to speculation on the impact of the coronavirus on global macroeconomic conditions. He added that some firms’ profitability will be directly impacted by the effects of the virus on China and other countries.

However, even with recent declines in equity prices, the value of the U.S. publicly traded corporate sector has increased at an annual rate of about 4.7% over the last two years, Bullard explained.

More Severe Scenarios

Bullard then discussed the impact of more severe scenarios involving the outbreak. While the risk remains small as of today, investors and policymakers are wise to worry about the possibility of a global pandemic, Bullard noted. “This is not what has happened with many other viral outbreaks, but each situation is somewhat different,” he said.

Bullard concluded, “In my view, further policy rate cuts are a possibility if a global pandemic actually develops with health effects approaching the scale of ordinary influenza, but this is not the baseline case at this time.”

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