CHICAGO (Reuters) - With less room to cut interest rates than in the past, the Federal Reserve must act quickly in the face of threats to the U.S. economic outlook like the coronavirus epidemic, the president of the Dallas Federal Reserve Bank, Robert Kaplan, said on Thursday.
“It’s wise to act sooner, more boldly, and it increases the likelihood that we’ll need to use less policy ammunition” later on, Kaplan told the Chicago Council on Global Affairs, on why he supported an emergency Fed rate cut earlier this week.
In evaluating whether more policy easing will be needed when the Fed holds its next regularly scheduled meeting, on March 17-18, Kaplan said he will look not at traditional measures like the monthly jobs report scheduled for release on Friday, but at how far and fast the new coronavirus spreads.
The number of new cases of COVID-19, the respiratory illness caused by the new virus, will be “a key factor at least I’ll be using to judge ... whether we should do more” monetary policy easing at the upcoming policy meeting, Kaplan told Bloomberg TV Thursday.
“I’m not going to be looking very much at traditional economic data to make these judgments,” he said.
Kaplan said he has ramped up his conversations with business contacts to better understand the effect of the epidemic, and while businesses may have come to grips faster with the shock to supply, they are still in the midst of trying to understand how the epidemic will impact demand.
The Fed delivered a surprise half-percentage point rate cut on Tuesday - bringing the target rate to a range of 1.00% to 1.25% - as cases of the new diseases exploded in South Korea and Italy and also gained in the United States, sending global stock prices into a swoon. Since then, cases have continued to rise, including the spread in the United States to more states.
Kaplan said the Fed did not act to address current stock market weakness, but cut rates in order to mitigate and moderate what could be tightening financial conditions in the weeks ahead.
“I am not doing it to impact market conditions,” he said, saying that efforts to contain the virus will likely slow business activity, though how deeply and for how long it is not clear.
Kaplan said he is hopeful the disruption to economic growth will turn out to last only one quarter or a quarter and a fraction, and for the U.S. economy to return to his pre-epidemic projected growth pace of about 2.25% this year.
Writing by Ann Saphir in Chicago; Editing by Leslie Adler