Fed leaves key interest rate unchanged, and is keeping a close eye on coronavirus

Stressing the U.S. economy is in good shape, the Federal Reserve on Wednesday left unchanged a key interest rate that influences borrowing costs, but it also said it is closely monitoring the severity of the deadly coronavirus and the potential for the illness to disrupt the global economy.

The central bank repeated its prior view that the U.S. is growing at a “moderate rate” while inflation remains subdued. Still, Fed Chairman Jerome Powell expressed some concern about the Asian influenza, which has drawn comparisons to 2002-’03 outbreak of SARS, and has claimed more than 130 lives and infected more than 6,000 people worldwide in a little over a week.

“It’s a serious issue. There is likely to be some disruption of activity in China and probably globally,” he told reporters, unprompted, in a news conference after the central bank’s first rate-setting meeting of the year. “We’ll just have to wait to see what the effect is globally.”

Financial markets DJIA, -0.11% SPX, -0.33% have been volatile this week due to worries about how the global economy may slow due to the outbreak of the deadly, novel viral strain, which reportedly originated in Wuhan, China, and is currently known as 2019 nCoV.



In a separate move, the Fed raised a special interest rate on banks meant to ensure the smooth functioning of financial markets and help the central bank keep a better handle on short-term interest rates.

The central bank voted to lift the rate it pays banks for excess reserves parked at the central bank, known as the IOER, to 1.6% from 1.55%.

Powell characterized the move as a “small technical adjustment” made necessary by all the liquidity flooding into the market.

The Fed began buying $60 billion of Treasury bills last fall after a momentary spike in an important short-term rate in money markets — a key mechanism used by financial institutions to fund themselves — rang alarm bells at the Fed and on Wall Street.

The Fed has also been lending billions of dollars to the market through short-term repo operations.
Some analysts have been calling the balance sheet policy “QE” or quantitative easing.

Some critics contend the Fed Treasury purchases have inflated the value of stocks and other assets perceived as risky, an outcome that could potentially cause financial bubbles that could burst later in the year as the central bank moves to scale back its purchases.

Asked about the criticism, Powell said “it’s hard to say at any time with any precision what is affecting markets.”

He said the purchases were just intended to raise the level of reserves and this was not similar to the Fed’s bond-buying in the wake of the financial crisis.

The Fed said it would keep lending to the short-term money market via short-term repo operations through April but adjust the size and the pricing of the auctions over that period so they are no longer needed. Previously, the central bank said the program would last through mid-February.

The rate-setting Federal Open Market Committee cut interest rates three times in 2019, in policy moves characterized as insurance cuts, to shield the U.S. economy from damages tied to the U.S. trade war with China. The economy has stabilized since the rate cuts, and has also been helped by a partial trade pact this month with China that eases some tensions between the global economic superpowers.

Powell said he was cautiously optimistic about the global outlook and was not worried about immediate risk from China.

The central bank’s description of the economy was basically unchanged from six weeks ago: the labor market remained strong, growth was helped by consumer spending, and inflation remained below the 2% target.

As a result, the bank voted unanimously kept its benchmark fed-funds rate steady in a range between 1.5% and 1.75%.

Powell suggested the FOMC is likely to remain on hold for quite some time assuming little changes in current trends.

“We believe the current stance of monetary policy is appropriate to support sustained economic growth, a strong labor market, and inflation returning to our symmetric 2% objective. As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy will likely remain appropriate,” Powell said.

One of the things the Fed is reviewing, he said, is how to incorporate what he called the “new normal” on inflation into the bank’s forecasts. Such a change could make the Fed less aggressive in raising rates than it has been in the past, especially when unemployment falls to very low levels.
He noted that powerful global forces have depressed inflation and interest rates and kept them much lower than would have been the case a few decades ago.

The Fed’s most recent intervention in financial markets, meanwhile, has become a hot topic on Wall Street.

Powell said the Fed would gradually taper its $60 billion of T-bill purchases once the level of bank reserves exceeded $1.5 trillion. This process will take place gradually.

He stressed the Fed would be flexible about its overall balance sheet policy. Financial markets were spooked in late 2018 when Powell suggested the Fed’s balance sheet plans were on “automatic pilot.”