Feb 26, 2020 - Economy & Business

Reassessing the global impact of the coronavirus

Illustration: Aïda Amer/Axios

Economists are rethinking projections about the broader economic consequences of the coronavirus outbreak after a surge of diagnoses and deaths outside Asia and an announcement from a top CDC official that Americans should be prepared for the virus to spread here.

What's happening: The coronavirus quickly went from an also-ran concern to the most talked-about issue at the National Association for Business Economics policy conference in Washington, D.C.

  • Most major economies in Asia are expected to either slow down significantly, halt or shrink outright in the first quarter, according to Reuters consensus polls.

What they're saying: "The CDC warning is a little bit alarming ... they're basically saying, 'It's coming,'" Julia Coronado, president and founder of Macropolicy Perspectives, tells Axios.

  • "The risk that it spills over to consumer confidence is one of the biggest risks, and the other big risk is that you get a major metropolitan area that has to shut down."
  • "The spillover to confidence is a much bigger issue than temporary interruptions to activity that can be made up later."
  • "It's a psychological thing and that feedback loop is an essential element of every recession."

Fed Vice Chairman Richard Clarida spoke to attendees at the conference and asserted in prepared remarks that the central bank was evaluating the outbreak and did not want to overreact.

  • But he also said that decisions about monetary policy now will be made on a “meeting-by-meeting basis,” a notable change from the Fed's previous stance that it plans to remain on the sidelines for 2020.
  • “If developments emerge that, in the future, trigger a material reassessment of our outlook, we will respond accordingly,” Clarida added.

Between the lines: Fed fund futures prices show traders now see a 62% probability the Fed cuts U.S. interest rates by its April meeting and an 87% chance of a cut by July.

  • In fact, there's a 52% chance of two rate cuts by July.

Don't sleep: The response of the Trump administration also has been a major worry, according to Douglas Holtz-Eakin, president of the American Action Forum, and Harvard professor Jason Furman. (Both previously served as chief economists for the Council of Economic Advisers.)

  • "You have to explain in a transparent fashion the nature of the threat that you’re dealing with so people don’t panic. I don’t see enough of that going on," Holtz-Eakin said during a meeting with reporters.
  • "This economy has been held up by household spending, consumer confidence has been high and risen, and anything that dings that up changes the way you think about what’s going on."

Go deeper:

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After its emergency rate cut, investors wonder what the Fed knows

Jerome Powell. Photo: Mark Makela/Getty Images

Investors and President Trump want the same thing after Tuesday's surprise 50 basis point cut by the Fed: more cuts.

The state of play: The announcement, two weeks to the day before the beginning of the central bank's scheduled March 17–18 policy meeting, has investors scratching their heads. "The Fed pulled the fire alarm without telling anybody why," Bernard Baumohl, chief global economist at the Economic Outlook Group, tells Axios.

Market overwhelmingly expects rate cut next month

Data: CME Group; Chart: Naema Ahmed/Axios

In one week, futures traders have gone from seeing virtually no chance of a rate cut at the Fed's next policy meeting to a more than three-quarters likelihood.

Why it matters: Economists aren't sure a rate cut would be effective at offsetting the damage from the coronavirus outbreak, and would put the Fed in a weaker position to bolster the economy should the U.S. fall into a recession.

Fed cuts interest rates to near zero in emergency coronavirus intervention

Photo: Mark Makela/Getty Images

The Federal Reserve on Sunday cut its benchmark interest rate to almost zero and launched a $700 billion quantitative easing program in response to the expected economic downturn and stock market slump caused by the coronavirus.

Why it matters: This is the most drastic measure the Fed could take to try to shield the economy amid a global pandemic. The central bank hasn’t made moves this dramatic since the financial crisis.

Go deeperArrowUpdated Mar 15, 2020 - Economy & Business