MNI EXCLUSIVE: Fed May Acknowledge Rate-Cut Case Amid Virus

By Jean Yung, Evan Ryser and Pedro Nicolaci da Costa

     WASHINGTON(MNI) - Current and former Federal Reserve officials see no need

to respond to the coronavirus outbreak with a rate cut for the moment, but some

told MNI they are beginning to think further accommodation will be necessary,

even if only as insurance against a worst-case scenario.

     There is still too little information on the outbreak and no consensus on

how containment efforts will hit the global economy, sources said, making it too

soon for the Fed to commit to a policy shift.

     But the FOMC may be looking at adding language to its March 18 policy

statement signaling it is keenly aware of the potential economic ramifications

of the outbreak and prepared to act if it presents a material risk to the

outlook, sources said.

     A pre-emptive rates move would mark a departure from the Fed's base case

since late last year when officials were comfortable holding rates steady for

the foreseeable future absent a material reassessment of the outlook.

     William English, former Fed Board senior special advisor, told MNI: "I

would think that the Fed will say that it is ready to act if necessary, but by

the March meeting it may be too early to tell."

     "If I were to make an argument for taking action it would be that while the

baseline outlook hasn't changed much, downside risks have gotten bigger and the

coronavirus could turn out to be really bad," English said. "Thus, at some point

policymakers might decide it's appropriate to easy policy as a matter of risk

management. They may see risks as weighted to the downside, and they could want

to ease monetary policy based on that. But we are not there yet."

     Separately, the Fed could provide emergency liquidity by lending to banks

through the discount window, encouraging banks to use the liquidity they have

stockpiled for such events, and temporarily loosening supervisory standards so

that banks will be free to meet customers' demand for emergency credit, sources

said, although without indicating whether such moves had been actively

considered.

     Bill Nelson, a former Fed Board economist, said: "Although not yet, there

are steps the Fed can and should consider taking that don't involve cutting

rates if things became disorderly, namely indicating the discount window is

available, and encouraging institutions to see the liquidity reserves they have

stockpiled as something they are encouraged to use in the event it is

necessary."

     --DATA TO WATCH

     Key to the Fed's decision-making will be survey data on consumer

confidence, and regional manufacturing and services activity as well as

financial conditions, sources said.

     There are doubts over whether lowering interest rates would be the best

policy response to the epidemic. Rates would do little to directly address the

supply disruptions the U.S. is expected to see.

     "I question the efficacy of cutting rates," former Dallas Fed President

Richard Fisher told MNI. "This is a shock that's driven by supply issues and

supply chain issues. It does affect consumption from the standpoint of

undermining confidence if this continues. But the question is what would a rate

cut do here?"

     But those in favor of a modest rate cut say it would help create a more

supportive backdrop for the economy, shoring up confidence at a time when

consumers and businesses are pulling back on spending. If the stock market

retreats further, it will also have a negative wealth effect on consumer

spending.

     Falling equities would likely coincide with tighter financial conditions

more broadly, adding to the case for a Fed cut.

     Markets are now pricing in a full 25bp rate cut by June, and at least two

25bp rate cuts this year.

     Nathan Sheets, former Treasury official and Fed Board economist, told MNI

that while a March cut is on the table there is probably "more weight on an

April cut." By early Q2 the effects of the coronavirus may be in the rearview

mirror and this would allow the Fed to have time to prepare markets.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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