Fed's Bullard: U.S. rate cuts 'a possibility' if coronavirus intensifies, not base case

FORT SMITH, Ark. (Reuters) – Federal Reserve rate cuts are ‘a possibility’ if the outbreak of coronavirus intensifies into a global pandemic with death rates approaching yearly flu outbreaks, St. Louis Federal Reserve bank president James Bullard said Friday, in the U.S. central bank’s most explicit assessment yet of how the epidemic is influencing its thinking.

But he said the base case is for the Fed to remain on hold as the virus runs its course and proves only a temporary disruption to the world economy, with the economic impact centered in China.

Economic impacts elsewhere “will likely be on a smaller scale,” he said.

Bullard does not vote on the Fed’s interest rate policy panel this year, but outlined in detail how he views the set of risks that have driven global equity markets into a broad selloff.

His prepared speech to the local chamber of commerce here included a table noting that the coronaries mortality rate was well below that of the seasonal influenza outbreaks that kill hundreds of thousands worldwide each year. By comparison a few thousand deaths so far have been recorded from what health officials call COVID-19.

As it currently stands the Fed “is in a good position because of previous policy rate cuts designed to ensure the economy against adverse shocks,” he said, referring to the central bank’s three rate cuts last year and even sharper pivot away from what were expected at the start of 2019 to be continued rate increases.

However he also acknowledged that investors and policymakers “are wise to worry about the possibility, still small as of today, that a debilitating global pandemic will develop in the weeks and months ahead,” an event that could prompt Fed action, Bullard said.

The flip side of the equity selloff, on the other hand, is a global flight to safety that has driven down U.S. Treasury yields, on its own “a bullish factor for U.S. economic growth” that would keep borrowing costs lower, Bullard noted.

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