–Virus Still a Supply Issue; Too Early to Assess Ultimate Effect
–Can’t ‘Extrapolate’ One Bad Day in the Markets into the Future
By Denny Gulino
WASHINGTON (MaceNews) – Cleveland Federal Reserve President Loretta Mester Monday told reporters at the annual NABE economic policy conference that business contacts, whose views become more important with the lack of quantifiable data, are saying the corona virus has not cut into U.S. demand and is still only a supply-side issue.
But business and the Fed are trying to assess early information and, she said, it’s too soon to assume the virus will amount to the kind of “material reassessment” that would force a change in monetary policy.
“Right now the most of the intelligence that they’re telling us is it’s more on the supply side,” Mester said of the Fed’s continual outreach to business executives.
“But I think they are also working through things, just we are in terms of looking at it so you know, I think it’s still early for them as well. But they haven’t reported any kind of turn-down in terms of demand yet.”
She continued, “Monetary policy can help if there’s a significant pullback” yet that is “certainly not in my forecast at this point and I think we just are going to have to wait and see what is the course of the disease.”
That kind of information, she continued, “that we get from that actual contact with people who are running businesses and having to deal with it, is very important in this kind of situation.”
It’s also too soon to “extrapolate” Monday’s severe downturn in the stock markets into the future, she said.
“I just caution right, right? You don’t want to overreact to volatility in the markets,” she said. “If you’re a monetary policy maker you certainly want to take into account … what’s happening in the financial markets and you certainly want to assess what financial conditions going forward are going to be but I don’t think it’s right to take one day and extrapolate that out.”
“Again, we’re just going to continue monitoring and see what the impact on the U.S. economy is,” Mester said, “because of course, you know, we can make scenarios where there is an impact on the U.S. economy.”
The ultimate effect of the corona virus is “going to depend on how large the impact is and also, as important, how long lasting it would be,” she said. “But at this point I see it as a risk to my outlook but the fundamentals underlying the U.S. economy still remain strong enough to support a trend growth as my model.”
She said scenarios can be generated that “sort of play out where there’s some material change in that outlook, for example, if consumers decide that they don’t want to go out and they don’t want to buy things and you know there’s risk in terms of financial market pullback. It doesn’t really depend on how deep and how long lasting something like that is to be able to say whether monetary policies should react to it.”
Recent non-virus uncertainties, like the trade turmoil, have been weathered well by the Fed, she said. “I personally think that the Fed got through that period quite well. I mean, there’s always going to be differences of opinions about you know, the timing.”
She said that although she wasn’t sure at the time that the Fed’s most recent three rate cuts were all necessary, now that the trade uncertainty is less but virus uncertainty is greater, that she thinks monetary policy is in the right place.
Besides, Mester added, “I don’t have fear that we’ll be behind the curve” but not cutting rates again sooner.
“I think that the kind of analysis that we’re going to be doing is to try to be very careful and deliberative of evaluating those risks and then making a decision based on our evaluation of the economy and the outlook and those risks,” she said.
Another channel through which the virus could hurt the U.S. economy is by damaging the global economy. “We’re monitoring the risk in trying to do scenario analysis of what the impact on the U.S. economy will be” and global conditions are “certainly one of the mechanisms through which an outbreak of disease like the corona virus could affect the U.S. economy in addition to supply chains and the financial markets.”
“It’s too early at this point to sort of extrapolate out,” she said. “We can do scenarios and in some of those scenarios things get contained, you know, the disease runs its course, people in China go back to work, and that’s the pretty benign scenario.”
There are other scenarios, she said, “that are worst case scenarios where it would be potentially something that monetary policy might need to cushion but at this point, you know, again I’m seeing it as a risk to the outlook but it certainly hasn’t changed my model outlook for the U.S. economy for the year.”
The Fed is going to keeping looking at data from the Centers for Disease Control and the World Health Organization and other and “how the progression of disease is one of the factors that are going to determine which scenario you’re in.”
So, she said, “You may expand your data sources but then you still filter it through the same kind of thing you always do which is talk to your business context about what they’re seeing on the ground right and what how they’re reacting right because that’s important too, and then also think about how this a shock like this feeds through your economic models that you use to forecast.”