How Will Federal Reserve Respond to Coronavirus?

As the coronavirus outbreak continues to claim lives and spreads across the globe, global markets have reacted with alarm. China’s economy has been particularly hard-hit, with some two-thirds of businesses in the country currently shut down.

The United States and other countries have responded to the virus by banning Chinese travelers, in an attempt to minimize the spread of the deadly outbreak in their respective countries. Could the Federal Reserve play a role in mitigating the economic damage due to the outbreak?

China’s central bank sprang into action this week, with an injection of $22 billion into Chinese stock markets, in an attempt to boost liquidity. On Monday, Chinese stock markets plunged 8% and the Chinese yuan also dropped sharply. However, Chinese stocks and the yuan have steadied since the injection of funds.

Federal policymakers could consider a change in monetary policy if the virus outbreak worsens. The coronavirus has already had a significant detrimental effect on China’s economy and matters could get worse. This week, Goldman Sachs projected that the virus could push China’s GDP as low as 5.5% in the first quarter of 2020, compared to the 6.1% gain in Q4 of 2020.

A further slowdown in China’s economy will certainly have a negative effect on the U.S economy, with Chinese tourists barred from the U..S. and reduced demand in China for U.S. goods and services. Under the recent limited trade agreement between the two countries, China committed to increase its purchases of U.S. exports by at least $200 billion in the next two years. However, given the severe disruption to China’s economy, the Chinese may be unable or unwilling to keep their promise.

The Fed could choose to trim rates in the spring if it appears that the Chinese economy is in serious trouble. The Fed has adopted a ‘wait and see’ attitude towards further rate moves, but the coronavirus could force the Fed to trim rates sooner than it had anticipated.