It’s unclear if yesterday’s emergency 50-basis-point cut in interest rates by the Federal Reserve will help immunize the US economy against coronavirus-related blowback. Meanwhile, a rise in reported cases of Covid-19 on a global basis remains the baseline forecast, based on today’s update of CapitalSpectator.com’s modeling (see today’s revised outlook below).
Cleveland Federal Reserve President Loretta Mester says the central bank’s surprise cut on Tuesday (Mar. 3) was necessary to support the near-term US economy in the face of a rising threat from the coronavirus. “The risks around that outlook had gone up significantly,” she explains. “There’s still a lot of uncertainty about the course of the virus and what impact it’ll have. We have already seen impacts in terms of travel and tourism, we’re going to see a reduction in activity for the first half of the year. This was really in response to the economy and the outlook and the risks around the outlook.”
Some economists disagree about the wisdom of the sudden easing in monetary policy. Larry Summers, a former Treasury Secretary, questions the basis for such a dramatic move and worries that the rate cut risks “scaring people.”
“I would rather see more stuff on the fiscal side such as small business loans to help companies weather the storm, as opposed to interest-rate cuts,” says Eric Souza, senior portfolio manager at SVB Asset Management. “That’s more of a concern–will companies be able to stay afloat?”
Tim Duy, a veteran Fed watcher and professor of economics at the University of Oregon, counters that “Fed rate cuts will be a necessity during this period, but won’t be a magic bullet.” He predicts that “the Fed will deliver more rate cuts in the weeks ahead. Just because they are not met with immediate market gains doesn’t mean they aren’t necessary or won’t be effective in supporting the economy.”
Whatever the merits of the Fed’s new easing policy, there’s no debate about the effect of the latest cut on the Treasury market. The benchmark 10-year Treasury yield, for example, fell below the 1.0% mark on Tuesday (Mar. 3) for the first time.
The one thing that everyone agrees on is that the health and economic consequences from the coronavirus remain a major source of uncertainty at the moment. “We need to know the extent of the virus in the US,” notes Julia Coronado, a former Fed economist who now runs MacroPolicy Perspectives, a consultancy. “We are not even doing broad-based testing. We don’t know where this is or who has it. The uncertainty is so high right now about the most basic things, and that’s weighing on the economy.”
For the moment, the economic data continues to reflect modest growth, although the full extent of coronavirus blowback, whatever that turns out to be, has yet to show up in the numbers. In any case, the latest GDP nowcasts look encouraging, suggesting that the US is going into the eye of storm with a tailwind. The Atlanta Fed’s GDPNow model, for instance, is estimating (based on the Mar. 2 nowcast) that first-quarter growth will pick up to 2.7%–up from Q4’s 2.1% rise.
The New York Fed’s Feb. 28 nowcast is a bit lower, estimating Q1 growth at 2.1%, but here too the analysis points to an ongoing expansion with minimal disruption.
The question is how or if the incoming numbers change the calculus? Unclear. Meantime, CapitalSpectator.com’s revised forecast of the near-term path of cumulative reported cases of Covid-19 on a global basis continues to rise, based on a proprietary econometric methodology.
Note that in the chart above the previous round of forecasts (published Feb. 27) are included (red lines). New data available since then shows that the actual number of reported cases has been slightly higher than the prior point forecast. Unfortunately, the upward trend in the expected number of global cases continues to rise in today’s revised outlook.
At some point the upward trend will peak. But for now, the near-term outlook remains worrisome in terms of the estimated path of globally reported cases.