MNI POLICY: Fed Report: Coronavirus Effects Could Spill Over>

--Current Policy Stance Appropriate, Fed Tells Congress in Report

--Open Market Operations 'Technical' in Nature, Effective

--Inflation Projected to Rise after Q1 

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve deems the current level 

of interest rates appropriate amid a strenghtening U.S. labor market, 

rising inflation and signs of a stabilizing global outlook, though possible 

spillovers from the effects of the coronavirus in China have presented 

a new risk to the outlook, the central bank said Friday in its 

semiannual report to Congress. 

     The Fed also reiterated that its repo operations and Treasury bill 

purchases since October that have pumped up the balance sheet to $4.1 

trillion from $3.8 trillion in July are "purely technical measures" to 

support the effective implementation of monetary policy and not intended 

to change the stance of monetary policy. 

     "Downside risks to the U.S. outlook seem to have receded in the 

latter part of the year, as the conflicts over trade policy diminished 

somewhat, economic growth abroad showed signs of stabilizing, and 

financial conditions eased," the Fed said. "The recent emergence of the 

coronavirus, however, could lead to disruptions in China that spill over 

to the rest of the global economy." 

     Investors' concerns about the implications of the outbreak on the 

economic outlook led to a flattening of the yield cure and increased 

uncertainty about near-term Treasury yields, the Fed said. Equity and 

bond markets also fell across global markets and oil prices moved lower 

amid fears that the outbreak could weigh on global demand. 

     Meanwhile, uncertainty over trade policy and weak global grwoth 

last year continued to weigh on business investment, while a pullback of 

demand by oil drillers and a suspension of deliveries of the Boeing 737 

Max airplane have contributed to a further weakening of the U.S. 

manufacturing sector. 

     Manufacturing output for 2019 was down 1.3%, likely spilling over 

into other sectors and subtracting a relatively "modest" half a 

percentage point from GDP, the Fed estimated. "In general, a decline in 

manufacturing similar to that in 2019 would not be large enough to 

initiate a major downturn for the economy," according to the report. 

     Overall, Fed policymakers remained optimistic on the U.S. economy, 

citing a "solid" pace of new jobs growth underpinning moderately rising 

consumer spending and an upturn in residential investment. 

     Inflation, at 1.6% in December, remained below the Fed's 2% target, 

but partly resulted from particularly low readings in the early part of 

last year that "appear to reflect idiosyncratic price declines in a 

number of specific categories such as apparel, used cars, banking 

services, and portfolio management services," the Fed said. It 

anticipates headline and core PCE inflation to end the year at 1.9%. 

     After holding a round of "Fed Listens" events hearing from a broad 

range of stakeholderes in the U.S. economy, the Fed noted that 

participants "generally did not regard the fact that aggregate inflation 

is running modestly below the Federal Reserve's 2 percent objective as a 

problem," a perception that "highlights a challenge" for the Fed as it 

prepares to reveal the outcome of a yearlong review of its policy 

framework. Analysts expect the Fed to make a move toward targeting 

inflation over an average period of time at the conclusion of its 

review. 

--MNI Washington Bureau, Tel: +1 202-371-2121; email: dcoffice@marketnews.com

     ** MNI Washington Bureau: 202-371-2121 ** 

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