Possible Fed’s Rate Cut in 2020- Outbreak May Hasten Results
Economists are trying to assess whether global central banks will make a joint effort to salvage the damage in their respective countries by leveraging their monetary policy tools.
On Monday, the People’s Bank of China (PBOC) kicked things off with a $22 billion injection to boost liquidity. The Asian stock markets plunged on the first day of trading after the Lunar New Year.
According to Benn Steil, the coronavirus outbreak could also force the Fed Reserve to step in and cut rates to ease the pain in the U.S. markets.
Benn Steil is the director of international economies. He’s also a fellow at the Council Fellow on Foreign Relations.
“The [Federal Open Market Committee] traditionally has been like a giant tanker,” he told CNBC’s, Seema Mody.
“It takes quite a few months for it to turn around,” he said in a Tuesday interview on Trading Nation.
Jerome Powel – the Fed Chairman has in the past emphasized the Fed’s “wait and see” posture following its last cut. Therefore, Steil doesn’t see the Fed moving quickly – however, he’s not writing off another rate cut this year.
According to the economist, a rate cut will be possible sometime in the spring if there will be clear signs of an economic slowdown.
China’s economic growth
Chinese economic growth could be at stake as the coronavirus weighs on its corporate activity.
According to Goldman Sachs, China’s GDP could fall to 5.5% from 6.1% reported by the end of 2019 if the crisis worsens.
Economic growth depends on how quickly China will contain the virus. It’s a reasonable but optimistic forecast if the situation China contains the virus soon. However, if cases continue to grow rapidly over the next few weeks, China’s economy will easily halve throughout the first half of 2020 to something closer to 3%.
Now, it could strain phase one US-China trade deal. In the deal, China committed to increase its purchases from the US by at least #200 billion over the next two years.
According to Steil, the commitment was a very ambitious target. Even the Chinese officials poured cold water on it and suggested that the numbers would be subject to market conditions.
Larry Kudlow also said there might be a delay in the export boom from the U.S. due to the coronavirus. The administration appears to be preparing the markets for dampened expectations.
Larry Kudlow is one of Donald Trump’s key economic advisors.
According to Larry, the U.S. is ready to react to further market weaknesses than China – at least on its monetary policy.
The U.S. has better potential to use monetary policy. This is because debt levels in China have built up to grossly unsustainable levels.
Currently, the PBOC is pumping new liquidity into the market to dig ditches that they would later fill in again. In contrast, the Fed in the U.S. has room to stimulate parts of the economy in a slowdown mode – notably the manufacturing and housing sector.
As global central banks’ potential to intervene grows, it’s not surprising that markets are also rallying. Steil added that PBOC’s $22 billion boosts was China’s first serious sign that China would react. The market believes that liquidity will lead to increased borrowing, production, consumptions, and later a stimulus effect.
