Fed’s Evans expects virus impacts on economy to be short-lived

Thursday, 5 March 2020 01:31 - - {{hitsCtrl.values.hits}}

Chicago Federal Reserve Bank President Charles Evans speaks during the Global Interdependence Center Members Delegation Event in Mexico City, Mexico - REUTERS

CHAMPAIGN, Ill. (Reuters): The coronavirus outbreak will likely have only a “short-lived” impact on the US economy, with a hit to growth in gross domestic product limited to perhaps a few tenths of a percentage point, Chicago Federal Reserve Bank President Charles Evans said on Tuesday night.

“The expectation is that it is going to be a relatively short-lived imprint on economic activity in the US,” Evans said in remarks at the University of Illinois, just hours after the Fed announced a half-percent interest rate cut in an emergency move in response to the virus.

Evans said the rate reduction should help sustain business and household confidence and guard against any economic fallout from the fast-spreading virus.

The outbreak of the virus in China and its rapid global spread have disrupted supply chains and curbed travel. Some economists believe it has the potential to cause a sharp economic downturn.

The Fed’s action — which came in an emergency meeting held just two weeks ahead of a regularly scheduled policy meeting — was in part aimed at assuring the public that the central bank was prepared to move “as part of a team,” Evans said, in a global effort that has seen economic officials from major nations pledge to offset any economic damage from the virus outbreak.

Evans said that while such events are unpredictable and the virus could become a more serious economic threat, he expected it to “play out” in perhaps six months.

“We do expect it is going to be transitory. ... There is uncertainty,” he said. “But you do expect, that unless it is much more virulent, that there should be a bounceback when people get back to work, the supply chains catch up.” Importantly, he said he did not expect a permanent hit to consumer confidence or behaviour.

The rate cut, however, did little to dent an ongoing drop in global equity markets, which fell sharply in the hours after the Fed announced the reduction in its overnight target interest rate to a range between 1% and 1.25%. Evans said that while he would have liked a more positive reaction after the emergency move, “there’s a lot going on” for investors to respond, including uncertainty about the ultimate course of the disease.

Where the Fed goes next, he said, is uncertain.

Many analysts expect further interest rate reductions, and Evans said the Fed was “monitoring the situation and we are going to respond” if conditions worsen.

What is clear, he said, is that there is little reason to contemplate reversing the cuts that were made, with inflation weak and the central bank’s need to prove it can meet its 2% target.

“I am comfortable with where we are,” Evans said, with little risk of excessive inflation even if rates remain at this level “for some substantial period of time.”