Fed Cautiously Optimistic on US Economy; Says Coronavirus Poses Risks

Minutes of the Federal Reserve’s January meeting released at 19:00 GMT on Wednesday showed that policymakers were cautiously optimistic about their ability to hold interest rates steady this year, even as they acknowledged new risks caused by the coronavirus outbreak.

Treasury yields pared gains on Wednesday after Fed officials highlighted the risks from the deadly coronavirus in the minutes of their last policy meeting.

Fed Minutes:  Coronavirus is “New Risk to Global Growth Outlook

“Some trade uncertainties had diminished recently, and there were some signs of stabilization in global growth. Nonetheless, uncertainties about the outlook remained, including those posed by the outbreak of the coronavirus,” the minutes released on Wednesday stated.

Keep in mind that health and economic conditions have weakened considerably since the Federal Reserve held their meeting on January 28-29.

“The threat of the coronavirus, in addition to its human toll, had emerged as a new risk to the global growth outlook, which participants agreed warranted close watching.”

Central bank policymakers said, for instance, that if the virus spread it could hit what appeared to be an improving growth picture in China.

The minutes noted that “early GDP releases showed a pickup in growth in China and some other Asian economies, though news of the coronavirus outbreak raised questions about the sustainability of that pickup.”

Fed Minutes:  Interest Rates

At the meeting, Federal Open Market Committee (FOMC) members voted to keep interest rates unchanged in a target range of between 1.50% and 1.75%. The minutes showed that members were skeptical about any major reconsideration of the central bank’s inflation target.

“Participants generally saw the distribution of risks to the outlook for economic activity as somewhat more favorable than at the previous meeting,” the minutes showed. Policymakers went on to say the current stance of monetary policy was likely to remain appropriate “for a time.”

Fed Minutes: Negative Headlines about Virus Weigh on Investor Sentiment

Policymakers also cited the potential impact on stocks, though the market has been performing well. Negative headlines about the virus have caused some volatility.

“Late in the period, concerns about the spread of the coronavirus and uncertainty about its potential economic effect weighed negatively on investor sentiment and led to moderate declines in the prices of risky assets,” the minutes said.

Fed Minutes:  No Symmetric Inflation Range

Policymakers discussed changing the Fed’s inflation goal during the central bank’s review of its main policy tools, but there were vocal doubts about adopting an inflation range.

“Most participants expressed concern that introducing a symmetric inflation range…could be misperceived as a signal that the Committee was comfortable with continued misses below its symmetric inflation objective,” the Fed said.