BUSINESS Fed's official says COVID-19 outbreak weighs on US economic growth

BUSINESS

Fed's official says COVID-19 outbreak weighs on US economic growth

Xinhua

10:46, March 04, 2020

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File photo: VCG

WASHINGTON, March 3 (Xinhua) -- The ongoing COVID-19 outbreak "will weigh on U.S. economic growth at least during the first half of this year, with a pullback in spending by households and businesses," a senior U.S. Federal Reserve (Fed) official said on Tuesday.

"It is what economists call a negative supply shock," Cleveland Federal Reserve Bank President Loretta Mester said in a speech posted on the bank's website.

"Much is still unknown about the disease, making it difficult to predict how large and persistent the economic impact will be. Heightened and persistent uncertainty can affect the economy," Mester said, warning that the supply shock could evolve into a demand shock.

"It raises the possibility that negative effects on consumer and business sentiment and a pullback in investor risk-taking could last after the spread of the coronavirus has stabilized," she said.

Mester's remarks came as the Dow Jones Industrial Average on Tuesday plunged more than 700 points and the yield on 10-year U.S. Treasuries dropped below 1 percent for the first time amid rising concerns about the COVID-19 outbreak.

"The extreme volatility in financial markets is noteworthy," Mester said, adding the first task of central bankers is to ensure that there is sufficient liquidity and funding to allow markets to continue to function in an orderly way in the midst of extreme volatility, and to assure the public that they are prepared to act as necessary.

While the virus's near-term effects on the supply side of the economy cannot be affected by lowering interest rates, Mester supported the Federal Open Market Committee (FOMC)'s decision to lower the target range for the federal funds rate by 50 basis points to 1-1.25 percent on Tuesday.

"The action taken by the FOMC can help support confidence and ease financial conditions of indebted households and firms, thereby helping to mitigate potential demand-side impacts of the virus," she said. "It was within this context that I supported today's interest rate reduction."

"Fed moved earlier and aggressive on COVID-19 in U.S.," Diane Swonk, chief economist at Grant Thornton, a major accounting firm, tweeted Tuesday.

"Proved true to their word to move with force to head blunt impact of negative shock. Won't be enough but is a first step on a long road to healing once the crises abates," Swonk wrote.

Fed Chairman Jerome Powell said Tuesday at a press conference that the spread of the coronavirus has brought new challenges and risks, while the magnitude and persistence of the overall effects on the economy remain "highly uncertain."

"In the weeks and months ahead we will continue to closely monitor developments and their implications for the economic outlook, and we will use our tools and act as appropriate to support the economy," he said.

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