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-- Vincent Reinhart's Base Case Is For Unchanged Rates In 2020 Unless Viral
Epidemic Drawn Out
By Evan Ryser
     WASHINGTON (MNI) - The Federal Reserve is likely to keep its policy rate on
hold through 2020 unless the coronavirus epidemic in China looks set to persist
into the second quarter, which could prompt the central bank to signal a
material change as soon as March, Vincent Reinhart, who held roles at the Fed
over 24 years including director of its monetary affairs division, told MNI.
     Reinhart's baseline view is for the funds rate to stay in its current band
between 1.50% to 1.75% already an accommodative stance after three cuts last
year, and roughly 75bps below what the Fed believes is the neutral rate of
interest, he said in an interview.
     -- SCENARIO ONE
     Under this scenario, output in China will slow pretty sharply in the first
quarter, he said, but should bounce back from May-June if the lockdown in Hubei
stops the spread of the virus. Overall Chinese growth in 2020 would moderate
only slightly, with limited impact on the U.S., whose economy is centered on
domestic demand, and service-centric. Furthermore, Reinhart noted that global
trade is picking up, global industrial production has stopped contracting, and
uncertainty over trade policy has eased.
     -- SCENARIO TWO
     If, however, the Fed perceives that disruption to Chinese economic activity
is set to extend into the second quarter, "that'll be a material change to the
outlook," Reinhart said. "And they'll have to be thinking about their stance of
policy at mid-year."
     In the more negative scenario, the fall in China's growth from Jan-March
will likely have been more pronounced and the prospects for a V-shaped economic
rebound in China will have receded.
     The Fed may have to act as soon as March, said Reinhart. Officials would
"have to change the way they're communicating policy. They may not be ready to
change policy yet, but you won't hear Chair Powell say, 'the economy's in a very
good place.'"
     He added: "A severe disruption to Chinese activity that extended past the
first quarter has to get them to change their outlook. That's why you'll hear
how they communicate the stance of policy differently in March."
--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com
[TOPICS: MMUFE$,M$U$$$,MT$$$$,MX$$$$]

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