The central bank slashed interest rates by half a percentage point a
week ago in a pre-emptive bid to shield the U.S. economy from the
fast-evolving global epidemic. But Fed Chair Jerome Powell also said it
was too early to tell the impact it would have, with most of the data
the Fed typically relies on being too backward-looking to be of use.
Instead, the Fed is turning to new methods to assess the likely
spread and get a read on local responses as policymakers weigh what
further action may be needed in the days and weeks ahead.
“I am talking extensively to epidemiologists and healthcare experts
across the country…to try and interpret what we are seeing and what we
are likely to see,” Dallas Fed President Robert Kaplan said in Chicago
last week.
For real-time impacts, the Richmond Fed has reached out to city and
county executives “to understand what this might look like in our
cities,” research director Kartik Athreya told Reuters on Friday.
Minneapolis Fed economists are monitoring credit card transactions while
San Francisco Fed researchers are now tracking a daily measure of
consumer sentiment published by Morning Consult.
These snapshots could quickly show whether the American consumer, the
engine of U.S. growth, is pulling back. But assessing how long that
could last relies on a good grasp of the outbreak’s escalation.
(Graphic: Unnerved? –
https://fingfx.thomsonreuters.com/gfx/editorcharts/HEALTH-CORONAVIRUS-FED/0H001R8FRC8X/eikon.png)
The economic impact “is largely going to depend on how many people
are going to be infected by this…how many people will be able to go to
work, and how many hours they will be able to put into production,” said
Arizona State University’s Bart Hobijn, who was a Fed economist during
the financial crisis.
For Kaplan, the number of new cases will be a key indicator as he
heads into the central bank’s policy meeting on March 17-18, at which he
and his fellow policymakers will have to provide their next set of
economic forecasts.
But an accurate reading remains elusive. The Trump administration has
been criticized for its slow response and the short supply of test
kits. The number of U.S. cases of coronavirus grew to 761 on Tuesday,
including 27 deaths, with fast-growing concentrations in cities like
Seattle, San Francisco and New York.
“Once you have a cluster in a certain city, there’s a risk, in light
of the facts here, that you might have many more undiagnosed cases than
we are aware of and there is a risk that those undiagnosed cases will in
turn infect other people,” Kaplan noted.
About three-fourths of the 50 U.S. states have now reported
infections. The slow pace of rolling out kits and testing capabilities
means that policymakers will have little concrete evidence about the
extent of the U.S. outbreak ahead of next week’s meeting.
“The amount of extra information that they’ll have in the next few
days, until these tests are widely available, is going to be minimal,”
said Mac Hyman, a professor of mathematics at Tulane University, who is
an expert in epidemic modelling.
Only with more widespread testing to identify cases can experts more accurately track the disease’s likely spread, he said.
Key to the length of the impact is also the extent to which people
are made more aware of how they can become infected and provided with
tools to prevent spreading the virus, from face masks to disposable
gloves.
Global stock markets have tumbled as investors fret about the
coronavirus causing a world recession, and roughly $6 trillion of U.S.
market value has been wiped out so far. Financial markets are predicting
another big interest rate cut over the next week even though estimates
on the hit to the U.S. economy vary widely.
(Graphic: U.S. stocks have fallen hard –
https://fingfx.thomsonreuters.com/gfx/mkt/13/3169/3134/Pasted%20Image.jpg)
A San Francisco Fed economist on Friday forecast U.S. GDP growth
could dip to about 1.8% this year, only a couple of tenths off
policymakers’ estimates before the outbreak took hold. But a Brookings
Institution paper published last week estimated a pandemic could
subtract as much as $1.8 trillion from U.S. GDP this year, a far greater
hit than the Great Recession.
So far, disruption in the United States has been mostly concentrated
in the travel and tourism industries, with flights, concerts and
conferences cancelled. Some businesses and universities have told
students to stay home and take classes online. Restrictions, and the
economic toll they take, could rise as the number of U.S infections
increases.
Even if policymakers can glean the speed and scale of the outbreak
and the scope of steps to contain it, that does not mean they can break
through the uncertainty that has gripped markets and the public.
“Right now, it’s fear,” said UCLA’s Peter Katona, an infectious
disease specialist who has investigated viral outbreaks for the CDC. “We
don’t know what the trajectory is. It’s anybody’s guess and nobody
knows.”
