Rate cut expectations give pause to soaring dollar

27 Février, 2020, 10:16 | Auteur: Auguste Feret
  • Coordinated Global Interest Rate Cut

US Secretary of the Treasury Steven Mnuchin said that he does not expect the coronavirus outbreak to have material effects on the "phase one" US-China trade deal, although that could change as more data becomes available in the coming weeks.

The Fed's economic dashboard to decide the course of interest rates includes financial market cues.

"At this issue, it is tough to assess the magnitude of the financial outcomes, but this new source of uncertainty is anything I will be cautiously checking", Mester mentioned.

It is "still too soon" to say whether the coronavirus outbreak will cause a material change in the US outlook, said Federal Reserve Vice Chairman Richard Clarida, signaling officials won't be rushed to judgment on the need to cut interest rates.

A flattening or inverted yield curve can indicate that investors expect interest rates to decline in the future, typically because the Fed reduces rates to ward off an economic slump. Both the St Louis Fed's James Bullard and the Atlanta Fed's Raphael Bostic said a rate cut wasn't yet necessary. "I don't see any urgent need to move until we have more information". But if price changes are sustained, that can influence the economy through changes in household wealth and business and consumer confidence.

In contrast to the Fed, the world's other major central banks such as the European Central Bank and the Bank of Japan have limited room for easing with their policy rates already at record lows.

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That echoed other Fed policymakers, who have so far stuck to the line that it is still too early to predict the impact on the US economy of the virus, while showing cautious optimism any effects would be temporary enough not to warrant a change in the path of monetary policy.

"The interconnectedness of our economies means that literally, no man is an island".

Kevin Warsh, a former member of the Federal Reserve Board, is floating the idea of the Federal Reserve coordinating a global interest rate cut to combat the unknown tail risk of coronavirus. "Monetary easing works best when interest rates are relatively high and the economy faces a demand shock".

"China was not as big a player in the global economy back then as it is today, so there is the potential for a larger impact" if supply chains are disrupted or investment postponed, Mester said. As concerns about the coronavirus have grown, however, the gap between the two has widened at roughly the pace seen last spring before the Fed's run of three rate cuts between July and October.

But with the virus spreading, it threatens to have a broader impact, Mann said. The outbreak of the new coronavirus in China adds another risk factor to the outlook, which otherwise seemed poised to provide steady growth, said Loretta Mester, president of the Federal Reserve's regional bank in Cleveland. Along those lines, the prospect for slower global growth past year "affected our monetary policy and our assessment of the outlook".

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