MNI INTERVIEW: Drawn Out China Epidemic Could Force Fed Change

-- 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

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