MNI POLICY: Kashkari: Virus Not a Major Risk to US Economy

--Minneapolis Fed Chief Says Rates Offer Only Mild Stimulus

By Greg Quinn

     (MNI) - The coronavirus outbreak isn't a major risk to the U.S. economy,

which is only getting a little bit of stimulus from interest rates, Minneapolis

Fed President Neel Kashkari said Tuesday.

     It's very hard to forecast how health authorities will control the outbreak

and officials are watching "very closely," he said at an event in Kalispell,

Montana. 

     "It is something clearly of a downside risk for China, and if it were to

come to the U.S. in scale, it would be a downside risk for our economy," he

said. "And if downside risk materialized, that could affect the path of monetary

policy. But I'm not sure what the Federal Reserve could do in terms of trying to

manage those risks."

     Those comments line up with Chair Jerome Powell and Mary Daly of the San

Francisco Fed, suggesting the FOMC won't add to their three rates cuts last year

made amid global risks from trade tensions and Brexit. Markets have fully priced

in a cut for later this year, and Kashkari said the flatter yield curve is a

sign investors don't see rates as being too far from neutral. 

     "Interest rates are slightly accommodative, we could be around neutral but

slightly accommodative, I don't think we are providing much of a boost to the

economy," he said. "Even though interest rates look like they are quite low

relative to history, they aren't quite low relative to neutral and that ends up

being the more important factor as we think about where the economy is going

from here."

     "As we raised short-term rates, we basically flattened the yield curve, and

I think the yield curve is giving us feedback on where neutral is, and that's

why I think we are close to neutral, or slightly accommodative today, but not

very accommodative," he said.

     The Fed has room to offer enough stimulus to combat a future downturn

between rate cuts and QE, he said. "I don't think we are out of capacity, I

think that's a tool that we would have more confidence using because we have

already done it once before."

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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