Federal Reserve officials signaled a willingness to cut interest rates if the coronavirus outbreak worsens, laying out a scenario in which the central bank might respond as infections and quarantines spread globally.
“We could cut rates if we got a global pandemic that actually develops with health effects that seem to be approaching the same level as seasonal influenza, but that doesn’t look like the baseline as of today,” James Bullard, president of the Federal Reserve Bank of St. Louis, said during a speech in Florida on Friday. Mr. Bullard does not vote on rate moves this year, but he is one of 17 regional and Washington-based officials who participate in policy discussions.
While his statement does not signal that the Fed will cut interest rates at its mid-March meeting, it lays out the sort of scenario that could prompt a Fed response. As coronavirus cases mount in countries outside of China and fuel worries that the world is staring down a pandemic, expectations that the central bank will slash borrowing costs have skyrocketed.
Investors had entirely priced in a March interest rate cut by Friday morning — a move that was viewed as barely possible just a week ago.
Loretta Mester, president of the Federal Reserve Bank of Cleveland and a monetary policy voter this year, told The New York Times in an interview on Thursday that the Fed should keep its options open. Ms. Mester, who is generally cautious about such moves, initially opposed the Fed’s decision to lower borrowing costs three times last year.
“We always have to come in with open minds about what’s going on with the economy, and every day we’re getting new information, especially with something that’s fast-moving, like this,” Ms. Mester said when asked whether a cut next month was possible.
Explaining the Fed’s calculus, Ms. Mester said officials are trying to gauge whether there will be longer-lasting economic effects from the virus, such as a hit to consumer confidence and demand.
“If people are temporarily staying home, not traveling, not interacting and purchasing things, that could be a short-term hit,” she said. “Or it could develop into something broader — and that’s the kind of calculus you have to do when you’re thinking about monetary policy.”
Those statements align with the central bank’s position to date. Fed Chair Jerome H. Powell and his colleagues have said they are watching coronavirus developments closely and monitoring it as an economic risk, but that it is too soon to tell whether they will merit a central bank response.
The comments also reflect a recognition that the virus could worsen, causing its economic drag to morph from a short-term blip to something that more seriously hits consumer confidence and spending.
Coronavirus cases in South Korea, Japan, and Italy are climbing fast. While there have been comparatively few confirmed infections in the United States, public health officials have warned that clusters of infection are likely to appear.
Stock market indexes were down sharply Friday morning, after falling for the previous six straight days. Investors have been pouring into United States government securities as they look for safe investments, pushing prices up and the yields on 10-year Treasuries to record lows.
Mr. Bullard said he is optimistic that the virus could be contained and said the Fed’s three rate cuts last year should help to protect the economy, which is currently growing steadily.
“Markets might be overestimating the probability of a global pandemic,” he told reporters following his speech. “Data seem to suggest that we’ll have a public health response globally that will bring the virus under control.”
But he also declined to rule out a Fed rate cut in March, or even before, should things worsen.
“I wouldn’t want to prejudge the March meeting,” he said. “Obviously the situation is very fluid, and we’re going to want to monitor events right up until the meeting.”
Asked if the Fed would consider an emergency cut before its next meeting, Mr. Bullard said he didn’t “have a sense” of whether that was possible given the situation’s fluidity.