Fed’s Clarida Says Coronavirus a ‘Wild Card’ for Outlook

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The U.S. central bank’s No. 2 official said it’s too early to determine whether the coronavirus outbreak in China will significantly affect the U.S. economy, which remains in a “good place.”

“It is a wild card,” said Federal Reserve Vice Chairman Richard Clarida in an interview on Bloomberg Television Friday. “We’re looking into how it translates into the outlook for Chinese growth, for global growth and for how it impacts the U.S.”

Clarida said the U.S. economy could absorb a temporary stutter, saying “if this were to result in, say, a one or two-quarter slowdown in growth, that’s probably not something that changes the big picture. But I do agree it’s a challenging situation. We’re going to keep on top of it.”

Fed policy makers left interest rates unchanged this week and Fed Chairman Jerome Powell hinted that he and his colleagues were shifting to an even more dovish posture in a effort to get inflation back to their 2% target over time, putting further downward pressure on 10-year Treasury yields.

Clarida reiterated that current policy was appropriate and the Fed wouldn’t shift interest rates unless there was a “material” change in U.S. forecasts. His remarks suggest a brief economic softening wouldn’t reach that threshold.

Financial markets are on edge over the economic fallout from the coronavirus, with U.S. stocks falling more than 1.5% Friday. The outbreak has claimed more than 200 lives in China and spread to more than a dozen countries, prompting the World Health Organization to declare a global health emergency.

The Fed vice chair repeated the U.S. economy is in “a good place” and played down the implications of a renewed inversion in a key portion of the yield curve.

“That is really driven not so much by an outlook for the U.S. economy, but globally when there is uncertainty money flows into the U.S.,” he said. “That tends to lower yields.”

A yield-curve inversion occurs when returns on shorter-dated Treasury securities exceed those on longer-dated bonds.

“I’m not today concerned about the inverted yield curve because I think it’s not really reflecting the U.S. outlook,” he added.

Clarida also said the Fed is continues to expect that current policy will raise inflation, which has undershot the central bank’s 2% target for most of the past seven years, gradually up to that goal.

“We’re not that far away now,” he said. “We provided some accommodation in 2019 with a total of three rate cuts, and we think with those rate cuts in place, it takes time for them to work through the economy, we do think and we project that we will get back up to 2%.”

(Updates with additional Clarida comments from 11th paragraph.)

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