US Federal Reserve Bank of Dallas President Robert Kaplan said the pace of acceleration of COVID-19 across the US would be an important factor as he weighs the need for another interest rate cut when policy makers meet later this month.
“I am going to be watching very, very carefully the path of diagnosed cases,” Kaplan said Thursday in a Bloomberg TV interview with Kathleen Hays in Chicago. “We’re just going to have to see what the actual developments are over the next 10 days, two weeks. That will be a key factor, yes, I will be using to judge what’s appropriate and whether we can wait longer.”
Kaplan backed the central bank’s decision on Tuesday to slash interest rates by half a percentage point in the first such emergency move since the 2008 financial crisis, amid mounting concern that the coronavirus outbreak threatens to stall the record US economic expansion.
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Investors were not impressed, and stocks have swung wildly this week amid expectations that the Fed would have to cut again when the US Federal Open Market Committee holds its next scheduled meeting on March 17 and 18 in Washington.
Investor confidence has been shaken as cases of the virus continue to spread across the US.
The S&P 500 fell more than 3 percent on Thursday while the 10-year Treasury yield sank to as low as 0.9 percent and the dollar sank against the yen.
Kaplan, who votes on policy this year, said he was not disturbed by market responses, because his goal was not related to today’s financial conditions, adding that monetary policy is not intended as a tool to eliminate volatility. Rather, as the virus’s impact spreads more widely, lower rates could help to counter a future tightening of financial conditions.
“It will help to moderate or mitigate some of that inevitable tightening of financial conditions,” he said, adding that would increase “the likelihood as we come out of this situation, we can come out more strongly.”
The Dallas Fed chief was speaking on the eve of the release of the monthly US employment report. Kaplan said that government reports might shed less light on how the virus was affecting economic activity given it takes time to show up in the data.
“It is too soon to judge,” he said. “I wouldn’t presume what we are going to do in the March meeting.”
Fed officials have not endorsed market expectations of another rate cut, with US Federal Reserve Chairman Jerome Powell giving no clear signals in a press conference following this week’s reduction.
St Louis Federal Reserve President James Bullard on Wednesday said that it would be wrong to assume that the Fed would cut rates again in two weeks because there might be little new information on which to justify an additional move. He also said the policy committee could always act between meetings if necessary.
Kaplan also said that fiscal policy might have a role to play in mitigating the virus’ impact. Some central banks abroad have discussed measures to keep credit flowing to small businesses suffering a credit crunch because of the fallout from the virus, which has shuttered factories in China and disrupted global supply chains.
Kaplan said that the Fed does not have the tools to undertake such targeted lending.
“What we can do is encourage banks to exercise forbearance with small borrowers,” he said.
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