US central bank won't shift rates but virus adds new risk factor

Federal Reserve policymakers opened their second day of deliberations on Wednesday and are expected to leave the key interest rate unchanged, but the deadly

SARS-like virus spreading in China adds a new element to keep central bankers on alert.

The US economy is on a steady though tepid growth path, but the outbreak of a new coronavirus that has spread to other countries has fueled concerns it could slow growth in China and the effects will spill over to the global economy.

Businesses, including factories, more than half of all Starbucks cafes and a Disney theme park have been shuttered in China, travel has been restricted, and major airlines have cancelled flights as authorities in Beijing try to contain the illness that has sickened thousands and killed more than 130 people.

That could undermine other major economies if global supply chains that flow from China are disrupted.

The Fed's policy-setting Federal Open Market Committee (FOMC) will announce the policy decision at 1900 GMT Wednesday and will likely repeat recent statements saying it will keep watch on "global developments."

Fed Chairman Jerome Powell is sure to face questions about the virus in his customary press conference following the policy decision and is expected to say that central bankers are keeping a watch for economic repercussions from the ailment.

Economist Joel Naroff said the virus could become a factor in policy if it hits financial markets "and if there are clear signs it will slow the economy."

"Powell seems to worry more about the markets than anything else even if he never says that," Naroff told AFP by email, noting the Fed's decision to stop raising interest rates at the end of 2018 "even though the economy continued on its merry way."

- Material change? -

The Fed cut the policy rate three times in 2019 amid signs the US and global economies were facing headwinds -- in part due to President Donald Trump's multi-pronged trade war that undercut growth.

"That could happen again, but he has no cushion this time as he ate up 75 bps (basis points) with the last set of easing," Naroff said of Powell.

The Fed chief has signaled that the central bank is only likely to move if there is a "material" change to the economic outlook.

"That bar has not been met," said Ian Shepherdson of Pantheon Macroeconomics.

"Even manufacturing, which is the weakest part of the economy, is merely stagnating rather than rolling over," he said in a preview of the Fed decision.

A trade truce between Washington and Beijing signed earlier this month had boosted stock markets worldwide amid hopes it would provide stability for businesses, but most of the punitive tariffs remain in place.

The virus undermined the global stock markets, but Wall Street rebounded on Tuesday and was moving higher on Wednesday amid positive company news.afp

 

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