Stressing the U.S. economy is in good shape, the Federal Reserve on Wednesday left unchanged a key interest rate that influences borrowing costs, but it also said it is closely monitoring the severity of the deadly coronavirus and the potential for the illness to disrupt the global economy.
The central bank repeated its prior view that the U.S. is growing at a “moderate rate” while inflation remains subdued. Still, Fed Chairman Jerome Powell expressed some concern about the Asian influenza, which has drawn comparisons to 2002-’03 outbreak of SARS, and has claimed more than 130 lives and infected more than 6,000 people worldwide in a little over a week.
“It’s a serious issue. There is likely to be some disruption of activity in China and probably globally,” he told reporters, unprompted, in a news conference after the central bank’s first rate-setting meeting of the year. “We’ll just have to wait to see what the effect is globally.”
Financial markets /zigman2/quotes/210598065/realtime DJIA +2.17% /zigman2/quotes/210599714/realtime SPX +1.23% have been volatile this week due to worries about how the global economy may slow due to the outbreak of the deadly, novel viral strain, which reportedly originated in Wuhan, China, and is currently known as 2019 nCoV.
Stocks fell sharply earlier in the week but have been attempting to claw back to near break-even levels for the week, despite reports of the illness’ rapid spread.
In a separate move, the Fed raised a special interest rate on banks meant to ensure the smooth functioning of financial markets and help the central bank keep a better handle on short-term interest rates.
The central bank voted to lift the rate it pays banks for excess reserves parked at the central bank, known as the IOER, to 1.6% from 1.55%.
Powell characterized the move as a “small technical adjustment” made necessary by all the liquidity flooding into the market.
The Fed began buying $60 billion of Treasury bills last fall after a momentary spike in an important short-term rate in money markets — a key mechanism used by financial institutions to fund themselves — rang alarm bells at the Fed and on Wall Street.
The Fed has also been lending billions of dollars to the market through short-term repo operations.
Some analysts have been calling the balance sheet policy “QE” or quantitative easing.
Some critics contend the Fed Treasury purchases have inflated the value of stocks and other assets perceived as risky, an outcome that could potentially cause financial bubbles that could burst later in the year as the central bank moves to scale back its purchases.
Asked about the criticism, Powell said “it’s hard to say at any time with any precision what is affecting markets.”
He said the purchases were just intended to raise the level of reserves and this was not similar to the Fed’s bond-buying in the wake of the financial crisis.