Today’s emergency interest rate cut could aid a slowing U.S. economy facing a significant threat from the coronavirus outbreak, according to Comerica Inc. economists.
The Federal Reserve Open Market Committee reduced the federal funds rate by a half percentage point, the largest decrease since the 2008 financial crisis.
In an economic alert following the Fed’s surprise announcement, Comerica economists wrote that the rate cut “comes as the U.S. government and the U.S. economy adapts to the threat of the coronavirus” that is sure to cause greater economic disruption and spurt further reductions.
“It is important to note that there is nothing the Fed can do to change the trajectory of the global coronavirus outbreak. It cannot alter the disruption to global supply chains and the demand destruction due to the temporary cessation of business production and personal travel. However, the Fed can ‘foam the runway’ and do what it can to support and encourage economic activity in the U.S. and foster a quick recovery from the dampening impact of the coronavirus outbreak,” Comerica economists wrote. “We believe that there is significant downside risk to the U.S economy from the global coronavirus outbreak. We expect the U.S. economy to slow meaningfully through the first half of 2020. Therefore, the Federal Reserve may decide to cut the fed funds rate further in the months ahead.”
In announcing the interest rate cut this morning, the FOMC noted that the “fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.”
“The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy,” the FOMC statement said.
Prior to today’s decision, PNC Bank noted in a global economic briefing issued Monday that the U.S. economy “is about to experience headwinds to tourism and travel that, even if not as severe as China’s, will nevertheless be painful near-term.” When combined with the drag on the economy from problems at aerospace giant The Boeing Co., PNC said that U.S. real GDP growth “will slow noticeably in the first half of 2020” from the effects of the coronavirus.
PNC estimates the risk of a U.S. recession at one-in-three, up from a 20 percent chance prior to the coronavirus update. If the outbreak becomes a “bigger hit” to the U.S. economy, PNC expects further rate cuts.
In an economic commentary this after, PNC chief economist Gus Faucher said that he expects the FOMC to hold rates at the present levels when it meets in two weeks, and that there was a 66 percent probability” of a 0.25-point rate cut at the April 29 meeting.
In Michigan, an updated outlook for the state’s economy issued last week by the University of Michigan assumed that the coronavirus would have “only a limited impact on Michigan's economy, but the virus is a major downside risk to our forecast.”
The University of Michigan predicted job growth “to tick back up over the next two years after a disappointing 2019,” to 30,700 additional jobs in 2020 and 28,900 in 2021.
“Although that may not sound like a substantial improvement from the 24,400 job gains in 2019, Michigan actually lost payroll jobs over the final three quarters of last year,” University of Michigan economists wrote in the Feb. 28 outlook.