Powell: Coronavirus ‘Poses Evolving Risks’ to U.S. Economy

Federal Reserve Chairman Jerome Powell on Friday described the ongoing coronavirus outbreak as an event that "poses evolving risks to economic activity," as pandemic concern continues to batter Wall Street.

In an unscheduled statement issued amid the stock market's worst week since the Great Recession, Powell said America's central bank would continue "closely monitoring developments and their implications for the economic outlook." He said he and his colleagues would use their "tools," including a cut to their benchmark interest rate, "as appropriate."

The Dow Jones Industrial Average suffered its worst points-loss in history on Thursday, dropping nearly 1,200 points. Losses continued on Friday as the index appeared certain to end the day in the red for a seventh consecutive session. The Dow opened Friday down nearly 15% from the all-time high it reached on Feb. 12. The Standard & Poor's 500 and major stock indexes around the world have weathered similar losses in recent days as coronavirus infection counts climb and a bevy of new countries – from Brazil to Nigeria to Norway – confirm their first cases of the virus.

"Financial markets have gone from irrational exuberance over the last four months to panic in the short space of a week and a half," Scott Anderson, chief economist and executive vice president at Bank of the West Economics, wrote in a research note on Friday. "For now the Fed remains in wait and see mode, saying it's too early to gauge the extent of the downside impacts on U.S. growth."

Powell and his colleagues have for weeks suggested they would wait to receive more information and economic data before making a decision about whether and to what extent the spread of the coronavirus would impact their plans for U.S. monetary policy. But even though Powell hardly committed to reducing interest rates at the Federal Open Market Committee's next formal gathering in March, his decision to acknowledge the outbreak in an unprompted statement underscores the severity of the situation in the U.S.

Powell described the fundamentals of the domestic economy as "strong" on Friday. And, indeed, recent economic reports suggest consumer spending and domestic output remain respectable. But losses on Wall Street and international supply chain disruptions – and the potential for the virus to spread more meaningfully in the U.S. – are expected to weigh on consumer sentiment and corporate profits in the months ahead.

"Risk of a 2020 recession in the U.S. is rising. I would put the risk today at least as high as it got last summer at around 40%," Anderson said. "The downside economic and financial risks have intensified sharply since the beginning of the year."

Central banks around the world are expected to step in to help support the global economy, and investors appear to believe at least one interest rate cut from the Federal Open Market Committee in the weeks ahead is a virtual certainty. Powell's Friday announcement suggests an emergency cut outside of a regularly scheduled meeting is not in the cards, at least for the time being.

"We believe the Fed will wait until the March 17-18 meeting to lower rates since an intermeeting easing could ignite further panic in the markets," Kathy Bostjancic, U.S. chief financial economist at Oxford Economics, wrote in a note on Friday.