Fed leaves key rate alone but sees virus among global risks

WASHINGTON — The Federal Reserve kept its key interest rate unchanged at a low level Wednesday amid an economy that looks solid but faces potential global threats, including from China’s viral outbreak.

The Fed sketched a mostly bright picture of the U.S. economy in the statement it released after its latest policy meeting. Yet it also cautioned that it would monitor the world economy, which could be slowed by China’s coronavirus — a risk that Chairman Jerome Powell mentioned at the start of a news conference. Stock and bond markets have gyrated in the past week over fears about the virus.

The central bank said it would hold short-term rates in a range of 1.5% to 1.75%, far below levels that have been typical during previous expansions. Powell and other Fed officials have indicated that they see that range as low enough to support faster growth and hiring.

Stock prices slipped modestly after the Fed issued its statement at 2 p.m. Eastern time and Powell began his news conference. Bond yields declined slightly.

The Fed’s statement, which the 10 policymakers approved unanimously, was nearly identical to the one it issued after its December meeting, though it described consumer spending as rising at only a “moderate” rather than at a “strong” pace. That change likely reflects relatively modest spending by Americans over the winter holidays.

Last year, the Fed cut its benchmark rate three times after having raised it four times in 2018. Powell and other Fed officials credit those rate cuts with revitalizing the housing market, which had stumbled early last year, and offsetting some of the drag from President Donald Trump’s trade war with China.

But China’s viral outbreak has injected fresh doubts into that outlook. The coronavirus has in effect shut down much of that nation and seems sure to slow the Chinese economy — the world’s second-largest — which had already been decelerating. The virus has now infected more people in China than were sickened in the country by the SARS outbreak in 2002-2003.

In his news conference, Powell said there have been encouraging signs that the global economy would pick up this year — until the coronavirus struck. The preliminary U.S.-China trade deal, the resolution of Brexit and low rates in the United States and abroad suggested that the world economy would expand more quickly.But Powell said that while the coronavirus was clearly disruptive, it’s too early to tell what its damage might be.

“It’s very uncertain about how far it will spread and what the (economic) effects will be in China, for its trading partners, and around the world, the chairman said.

Major companies across the world have responded to the virus by suspending some operations in China. Starbucks said it plans to close half its stores in China, its second-largest market. British Airways has halted all flights to China, and American Airlines suspended Los Angeles flights to and from Shanghai and Beijing.

Hotels, airlines, casinos and cruise operators are among the industries that have suffered the most immediate repercussions, especially in countries close to China. Apple CEO Tim Cook said the company’s suppliers in China have been forced to delay the re-opening of factories that have closed for the Chinese New Year holiday until Feb. 10.

Investors seem increasingly to believe that the Fed will feel compelled to cut rates again later this year. The chances of a cut by September’s Fed meeting have risen to about 56%, according to the Chicago Mercantile Exchange’s FedWatch tool, up from 37% just a month ago.

Still, the Fed will likely wait to see how last year’s rate cuts play out. Among other benefits, the cuts have helped drive down mortgage rates and led home buyers to bid up prices on a dwindling number of available properties. Home sales jumped in December and were nearly 11% higher than a year earlier.

Since they last met in December, Fed officials have presented a nearly unified front in support of keeping rates unchanged, possibly for the rest of this year. That contrasts with last year, when both “hawks,” who tend to favour higher rates, and “doves,” who typically lean toward lower rates, occasionally dissented from the Fed’s rate decisions.

The Fed’s decision came a day after Trump, in a tweet, again pressed Powell to cut rates, arguing that this would make U.S. interest rates “competitive with other Countries.” Yet the Fed hopes to avoid the ultra-low and negative interest rates that exist in much of Europe and Japan, which they — and most analysts — see as evidence of weak economies.

Most analysts think the Fed would be more willing to cut rates if there were clear signs of a sharp economic slowdown. Still, some Fed watchers say they foresee a rate cut by the summer or after November’s elections.

One reason for a potential future cut is that inflation remains chronically low. According to the Fed’s preferred inflation gauge, prices rose just 1.5% in November from a year earlier, below the central bank’s 2% annual target. Since the Fed adopted that target in 2012, inflation has failed to consistently reach that high, to the surprise of the Fed and most economists.

Christopher Rugaber, The Associated Press