Monday, Financial markets upped bets that the Fed will be pressed to cut interest rates to cushion a feared hit to economic growth from the spread of the coronavirus.
US interest rates futures rose to their highest marks since last Fall as evidence the virus was spreading further outside its original epicenter of China spurred a global sell-off in stocks and panicked buying of government bonds.
The world economy is facing risk from COVID-19, though it is not clear how much economic damage the virus will do. But it is clear from the damage being done to China’s economy that the virus could result in a significant worldwide economic slowdown.
Such a global economic slowdown could lead to continued upward pressure on USD, which would drive inflation even further below the Fed’s 2% target in the next couple of years. And a broad slowdown in the world economy would lead to lower US employment growth, as American businesses endure reduced demand for their goods and services.
The Fed’s rate-setting FOMC holds its next meeting on 17-18 March.
“I do not think that the FOMC should wait that long to deal with this clear and pressing danger. I would urge an immediate cut of at least 25 bpts or 50 bpts. That’s a cheap insurance policy for the economy that the Fed should not pass up,” said Narayana Kocherlakota is a former President of the Federal Reserve Bank of Minneapolis from 2009 to 2015.
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