Fed chairman: Coronavirus could hurt the global economy

Federal Reserve chairman Jerome Powell on Tuesday warned Congress that the coronavirus could hurt the global economy.

“We will be watching this carefully,” Powell testified before the House Financial Services Committee, where he delivered his semiannual report to Congress. “What will be the effects on the US economy? Will they be persistent? Will they be material? That’s really the question.”

Powell refrained from speculating about the potential economic impact of the coronavirus. But noted, “We know there will likely be some effects on the United States.”

In prepared testimony, Powell noted coronavirus could lead to disruptions in China that spill over to the rest of the global economy. He will testify again before the Senate Banking Committee at 10 am ET on Wednesday.

The outbreak of the coronavirus, which has now killed more than 1,000 people, has added uncertainty to the global outlook — and the US economy — as companies have shuttered plants and shifted supply chains to contain spread of the infectious disease.

In late January, Powell described the outbreak as a “very serious issue,” but at the time, he noted the virus was still in its early stages and it remained uncertain how far it would spread and what the macroeconomic effects would be.

Holding rates steady

Powell spent last year guiding the Fed to help buffer the US economy from turbulent trade tensions between the United States and China. The trade war led to weakness in the manufacturing sector, hurt business investment and slowed global growth.

The Fed slashed interest rates three times last year — in July, September and October — to a range of between 1.25% and 1.5%. Since then, Powell has signaled the central bank plans to take a wait-and-see approach for this year, a stance he once again reinforced in his testimony to lawmakers.

“The current stance of monetary policy will likely remain appropriate,” said Powell. Adding, “If developments emerge that cause a material reassessment of our outlook, we would respond accordingly.”

In his testimony, Powell sought to thread the needle of sending a reassuring message that the US economy is still in “a good place,” but that policymakers would act as needed to continue the longest-running expansion on record, now in its 11th year.

Low unemployment, but a ballooning deficit

The Fed chairman has routinely pointed to the country’s record low unemployment rate as a benefit to low-and middle-income families, who have been among the last to reap rewards from the economic expansion. He pointed to higher wages for those communities, particularly those with lower-paying jobs.

Even so, Powell cautioned that the country continues to face challenges, including drawing in more workers into the labor force, boosting productivity and reconciling with a ballooning federal deficit.

The renewed warning by Powell to Congress to get the nation’s fiscal house in order comes weeks after the nonpartisan Congressional Budget Office released its latest report, projecting that the deficit would widen over the coming decade, reaching a total of $1.7 trillion in 2030.

“Putting the federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy during a downturn,” said Powell. “A more sustainable federal budget could also support the economy’s growth over the long term.”

With interest rates at historic lows, the Fed’s ammunition to rescue the economy is diminished, requiring fiscal policies by Congress to help offset any economic weakness.

Powell’s testimony comes a day after the White House released President Donald Trump’s fiscal 2021 budget blueprint, which calls for deep cuts in safety net programs and projects a balanced budget by 2035 assuming the economy returns 3% economic growth annually.

That’s significantly higher than what most economists and the Federal Reserve forecast.