Fed Official Says Coronavirus Economic Fallout ‘Could Spill Over’

WASHINGTON — The Federal Reserve is watching developments surrounding the deadly coronavirus closely, but a top official on Tuesday signaled that the central bank is not yet ready to act.

Vice Chair Richard H. Clarida said that economic disruptions in China from the virus “could spill over to the rest of the global economy” but added that “it is still too soon to even speculate about either the size or the persistence of these effects, or whether they will lead to a material change in the outlook.”

Mr. Clarida is the highest-ranking Fed official to speak since numbers reported over the weekend suggested the virus had begun to spread more quickly outside China’s Hubei Province.

The coronavirus has now infected more than 80,000 people in at least 33 countries. Officials at the Centers for Disease Control and Prevention on Tuesday warned Americans to prepare for the disease to spread in the United States, and a day after its worst one-day slide in two years, the S&P 500 continued to tumble.

Mr. Clarida’s remarks suggest that the central bank is not yet prepared to cut interest rates to cushion the economy against the risk, even as investors bid up the chances that policymakers will cut borrowing costs this year. It is hard for economists and Fed officials to assess just how significant the coronavirus fallout will be, as it remains unclear how far and fast the illness will spread.

  • Updated Feb. 26, 2020

    • What is a Coronavirus?
      It is a novel virus named for the crown-like spikes that protrude from its surface. The coronavirus can infect both animals and people, and can cause a range of respiratory illnesses from the common cold to more dangerous conditions like Severe Acute Respiratory Syndrome, or SARS.
    • How do I keep myself and others safe?
      Washing your hands frequently is the most important thing you can do, along with staying at home when you’re sick.
    • What if I’m traveling?
      The C.D.C. has warned older and at-risk travelers to avoid Japan, Italy and Iran. The agency also has advised against all non-essential travel to South Korea and China.
    • Where has the virus spread?
      The virus, which originated in Wuhan, China, has sickened more than 80,000 people in at least 33 countries, including Italy, Iran and South Korea.
    • How contagious is the virus?
      According to preliminary research, it seems moderately infectious, similar to SARS, and is probably transmitted through sneezes, coughs and contaminated surfaces. Scientists have estimated that each infected person could spread it to somewhere between 1.5 and 3.5 people without effective containment measures.
    • Who is working to contain the virus?
      The World Health Organization officials have been working with officials in China, where growth has slowed. But this week, as confirmed cases spiked on two continents, experts warned that the world is not ready for a major outbreak.

Larry Kudlow, the director of the National Economic Council, played down the risk, declaring on CNBC that the virus had been “contained” and would not do serious harm to the economy.

“We’ve contained the virus very well here in the U.S.,” Mr. Kudlow said, adding, “I don’t think it’s going to be an economic tragedy at all.”

The coronavirus could affect the United States economy in several ways. If supply chains are disrupted by quarantines in trading partners, there could be a short-term hit to production and growth. If the spreading virus makes investors skittish and causes a protracted market slump, that could feed through to credit conditions, making it harder for households to borrow and spend. If more infections come to American shores, prompting quarantines, the fallout would be even more pronounced.

As stocks slid for the second day running, Mr. Kudlow predicted that “the virus story is not going to last forever,” and that the United States economy would be able to overcome any headwinds.

He suggested that it was a good time for long-term investors to buy equities and said he did not expect the Fed to “make any panic move.”

“The markets are obviously reflecting a lot of new fears,” Mr. Kudlow said. “I do not think these are fundamental factors.”

Robert S. Kaplan, the president of the Federal Reserve Bank of Dallas, signaled in an interview that he was not particularly concerned with the stock market swoon.

“It broke to the high side,” Mr. Kaplan said of stock market valuations before the recent decline. “I watch this market correction in the context of where we started.”

But he and his colleagues are watching the virus itself carefully, he said, and Mr. Kaplan is especially attuned to what it means for supply chains and logistics.

“We’re just going to have to monitor this very carefully over the next X number of weeks,” he said.

Fed officials entered 2020 planning to leave interest rates unchanged for a time, and they are waiting for something to significantly change their economic outlook before they alter that course. The Fed slashed its policy rate three times last year to blunt the effects of a global growth slowdown and to cushion against uncertainty stemming from President Trump’s trade war.

The economy is now growing steadily, with a jobless rate that has hovered near a half-century low for more than a year and inflation that has remained persistently below the Fed’s 2 percent target. That gives the Fed room for patience before it moves again, officials have said.

Investors, for their part, increasingly expect the Fed to act. Markets have nearly fully priced in a rate cut by year end, and see high odds that the Fed could cut more than once. Fed officials next meet on March 17 and 18 in Washington, giving them time to watch incoming information before they make any decisions.

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