Fed Chair Jerome Powell took the unusual step of issuing a terse statement on Friday, February 28. It said, “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”
Some will read it as a promise for further accommodation in interest rate policy. While it does signal the Fed’s willingness to step in if necessary, it should be noted that the first sentence is about the strong fundamentals of the US economy. As distressing as the rapid drop in equities may be, it is also open to interpretation that this is also a correction for an overheated and/or overvalued market as much as a sudden excess of concern about the economy — domestic and global. I doubt it means a change of direction for monetary policy unless it looks like the economic data is indeed taking a substantive turn for the worse. That hasn’t happened yet. Growth may be softer in the first quarter 2020 but it should still be growth. The Fed is going to be careful about its next steps and where it can, make them on the long view.
The Fed Chair’s statement is intended to calm markets which have gotten little enough reassurance that the Trump Administration is approaching the crisis with facts and resolve. In conjunction with the Friday afternoon timing, it should give markets time to take a breath over the weekend and come back on Monday with less sense of crisis looming.
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