Federal Reserve's Mester sees possible economic impact from coronavirus outbreak

[LONDON] The coronavirus outbreak has muddied the outlook for the US economy and could weigh on growth in the first half of this year, Cleveland Federal Reserve Bank President Loretta Mester said in London on Tuesday.

While the world's largest economy remains strong, concerns about the virus could lead to a pullback in spending by households and businesses, a shift that policymakers hope to counter with the emergency rate cut announced Tuesday morning, Ms Mester said.

"This is a rapidly evolving situation that we are continuing to monitor closely," Ms Mester said at a dinner hosted by the Society of Professional Economists. "For the US economy, the risks and uncertainty surrounding the outlook have increased in a short period of time."

The Fed cut interest rates Tuesday by half a percentage point in an emergency move meant to protect the US economy from the negative effects of the spreading coronavirus.

"The virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad, for some time," Fed Chair Jerome Powell said at a news conference after the US central bank said it was lowering its interest rate target to a range of 1.00 per cent to 1.25 per cent.

Worries about the coronavirus rocked financial markets and brought stock markets into correction territory. On Tuesday, 10-year Treasury yields fell below 1 per cent for the first time, a sign that investors are searching for safety.

"The extreme volatility in financial markets is noteworthy," Ms Mester said. "When a shock like this hits financial markets, 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."

The virus is already taking a toll in the United States, with reductions in travel and social and business gatherings, and consumer, business and investor confidence all suffering, Ms Mester said.

While lower interest rates are unlikely to do much to ease supply chain disruptions or make consumers more comfortable with traveling or socialising, they could boost confidence and provide some relief to households and businesses with debt, Ms Mester said.

The Fed's next policy decision in two weeks will be driven by the latest news on how the coronavirus is affecting the economy, Ms Mester said.

"We will be paying as much attention as we can on where things are, our assessment of risk," she said during a question and answer session following her speech.

REUTERS