A man walks by the U.S. Federal Reserve building in Washington D.C., the United States, on July 31, 2019. (Xinhua/Liu Jie)
The U.S. Federal Reserve is under pressure to lower interest rates in the next few months as the COVID-19 outbreak roiled global markets and posed downside risk to the U.S. economy, analysts said.
"COVID-19 poses downside risk to the U.S. economy, and though there are limits to monetary policy, the Federal Reserve may need eventually to step in," Ryan Sweet, an economist with Moody's Analytics, wrote Thursday in a report.
"An emergency rate cut is unlikely, as these are rare. The most likely outcome is that the Fed continues to wait and see how financial market conditions fare and whether the coronavirus is having significant direct or indirect impacts on the U.S. economy," he said.
Tim Duy, professor of the University of Oregon and a long-time Fed watcher, noted that virus-related concerns continued rocking financial markets and the market response is not unreasonable.
"The magnitude, both in terms of human and economic costs, of an outbreak in the U.S. remains very uncertain. It is not a surprise that market participants should fall into the 'sell first, ask questions later' mode," Duy wrote Friday in a blog post.
All three major U.S. stock indexes tumbled into correction territory this week. The Dow Jones Industrial Average dived for the fifth day in a row Friday, falling more than 800 points, or more than 3 percent, shortly after the opening bell.
Duy believed that the Fed "has a clear role to play" in the current situation and the central bank can't "let runaway selling on Wall Street like we have seen this week continue and shake confidence on Main Street".
"This is not just about a supply-side shock. This is now about preventing the soft-patch on the demand-side of the economy from becoming a recession," he said.
While Fed officials don't have to cut rates now, they need to "make clear they are prepared to cut rates much as Federal Reserve Chair Jerome Powell did last June with his 'act as appropriate to sustain the expansion' comments," according to Duy.
"The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity," Powell said Friday afternoon in a brief statement before the financial markets closed for the weekend.
"The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy," he said, signaling the central bank is prepared to cut rates if necessary to support the economic expansion.
"Powell's comments on evolving risks and reassurance that the Fed would ease in response to COVID19-related weakness is no silver bullet but much welcomed signal of support for what has now become more of a panicked sell-off," said Diane Swonk, chief economist at Grant Thornton, a major accounting firm.
The Fed lowered interest rates in July, September and October last year in an effort to insure against downside risks from weak global growth and trade tensions. After wrapping up its first monetary policy meeting of 2020 in late January, the Fed left interest rates unchanged and maintained a wait-and-see stance.
James Bullard, president of the Federal Reserve Bank of St. Louis, believed that these insurance cuts in 2019 have put the Fed in a good position to "monitor the evolving coronavirus impact on the global economy".
"Further policy rate cuts are a possibility if a global pandemic actually develops with health effects approaching the scale of ordinary influenza, but this is not the baseline case at this time," Bullard said Friday at an event in Arkansas.
The current federal funds rate target range stands at 1.5 percent to 1.75 percent. The futures market currently assigned a probability of roughly 90 percent for a 50-basis-point rate cut in March, according to the CME Group's FedWatch tool.
The odds of a Fed rate cut will increase if financial market conditions continue to tighten, according to Sweet.
"The Fed has shown that it will respond more quickly to an inversion in the yield curve, and a rate cut could help bolster investor sentiment," he said.
John Lonski, chief economist of Moody's Capital Markets Research Group, warned that Fed's rate cuts may fall short of stabilizing markets.
"What the Fed can do is help to facilitate access to financial capital for those households, businesses and local governments that incur cash flow problems owing to the virus," Lonski said, noting Fed's rate cuts by themselves will not remedy the COVID-19 virus.
The virus is expected to trim U.S. economic growth by two-tenths of a percentage point to 1.7 percent in 2020, according to Moody's Analytics.
