Fed chairman Jerome Powell warns of possible economic fallout

WASHINGTON – Federal Reserve chairman Jerome Powell warned lawmakers on Tuesday (Feb 11) that the coronavirus epidemic sweeping China could pose broader economic risks, even as he signalled that the central bank is comfortable holding interest rates steady for now.

“We are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy,” Powell told House Financial Services Committee members.

The central bank chief is also set to testify before the Senate Banking Committee on Wednesday.

Powell is expected to face questions from lawmakers about what the Fed plans to do in 2020, as the economy continues to add jobs but inflation remains low. An initial trade deal with China has eased one major source of economic uncertainty, but the new virus has emerged as an economic wild card.

“Some of the uncertainties around trade have diminished recently, but risks to the outlook remain,” Powell said.

Still, as long as incoming economic information remains in line with the Fed’s outlook, “the current stance of monetary policy will likely remain appropriate.”

The Fed’s policy rate is now set in a range of 1.5 per cent to 1.75 per cent, after officials cut it three times last year to insulate the economy against wobbling global growth and fallout from President Donald Trump’s trade battles.

The housing market perked up as the Fed made its cuts, and the economy as a whole is growing steadily through a record 11th year of expansion.

Interest rates have fallen across advanced economies as the population has aged and productivity growth has slowed, which means that the Fed will likely have less room to cut borrowing costs to coax the economy back to life in future downturns.

That means “it would be important for fiscal policy to help support the economy if it weakens,” according to Powell’s remarks.

“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 stabilising the economy during a downturn,” he said.

“A more sustainable federal budget could also support the economy’s growth over the long term.”

The budget deficit topped US$1 trillion (S$1.3 trillion) in 2019.