America has “contained” the coronavirus, National Economic Council Director Larry Kudlow said on Tuesday, noting that the U.S. economy is “fundamentally quite healthy” amid the rapid advance of the disease.
“We have contained this. I won’t say air-tight, but it’s pretty close to air-tight,” Kudlow told CNBC on Tuesday. The outbreak is a “human tragedy,” but it’s not likely to become an “economic tragedy,” he noted.
Kudlow’s comments came after Dr. Nancy Messonnier, the head of the Centers for Disease Control and Prevention’s National Center for Immunization and Respiratory Diseases, said during a media briefing Tuesday that “it’s not so much a question of if this will happen any more, but rather more a question of exactly when this will happen and how many people in this country will have severe illness.”
Kudlow also noted that he does not expect the Fed to “make any panic move” to cut rates as a result of the epidemic — despite a 1,000-point plunge on the Dow Jones Industrial Average on Monday. The Dow was down by around 800 points in midafternoon trading Tuesday.
“I think they would prefer the option of staying the course with rates,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.
According to experts, though, policymakers might not have a choice. As recently as a month ago, the CME’s Fed Watch predictive tool showed only a 4 percent probability of a rate cut, and a 13 percent chance of a hike when the central bank’s Board of Governors meets next month. As of Tuesday, the probability of an increase had dropped to zero, and the likelihood of a cut rose to 19 percent.
The highest probability was for no change — above 80 percent in both cases — but the reversal at the margins shows how volatile the situation is likely to remain in the coming weeks, experts say. And the specter of a bigger economic hit that affect the U.S. more directly means that a June rate cut is seen as increasingly probable.
“The market is predicting — or, basically asking — the Fed to cut, but not right away,” said David Bahnsen, chief investment officer of The Bahnsen Group.
There are still too many unknown variables regarding the novel coronavirus that has spread from the Hubei province of China throughout Asia, into the Middle East and Europe, for investors to have much certainty about how or when the U.S. could be affected, but the centrality of China to global manufacturing supply chains means that the ripple effects could be large. Experts said the trajectory of the virus, the severity and duration of its spread, will be a key determinant for the Fed’s decision-making next month — particularly if one or more outbreaks strike the U.S.
“Given where the markets are now, if the meeting was today, they’d have to cut rates,” said Joseph LaVorgna, chief economist for the Americas at Natixis. “However, it’s possible between now and another month that the economy looks better than expected. … Right now, they’ve got the luxury of sitting and waiting.”
The Fed has good reason to wait, said Scott Ladner, chief investment officer at Horizon Investments.
Ladner expressed a commonly cited concern that lowering rates — especially since the benchmark rate is below 2 percent to begin with — gives the Fed little room for implementing more stimulative policies in the event of a recession.
“The March meeting is probably too early for them to take any action. They’ve got more ammo than other global central banks, but it’s not unlimited ammo,” he said.
“I’m in the camp that I don’t want the Fed to have to continue with cutting when it’s purely sentiment- and market-driven,” Bahnsen said, adding that a more potent policy tool might be the extension of the short-term liquidity injections the central bank has been providing to the “repo,” or inter-bank lending, market.
“When you have factory workers not going to their jobs, that’s not something you can fix with short-term interest rates.”
“A rate cut is far less significant as a monetary tool at this point compared with the quasi-QE4 bond buying,” he said. “Short-term T-bill buying to get the yield to un-invert has the effect of providing very significant liquidity priming into the marketplace.”
Making it less expensive to service debt can, in some cases, help businesses stay solvent and able to weather a downturn. “Lots of businesses will be pinched for cash. Making credit easier will smooth that,” said Bryan Routledge, associate professor of finance at Carnegie Mellon University.
“What they’ll want to ensure is they’re doing what they can in an effort to not necessarily provide preventative medicine to the outbreak, but to accelerate the recovery,” Luschini said.
But Routledge pointed out that the Fed’s policy toolbox can only go so far to mitigate the economic fallout that the outbreak has the potential to cause.
“It’s hard to fix a real problem with monetary policy,” he said. “It’s hard to fix a lack of physical goods with monetary policy. When you have factory workers not going to their jobs, that’s not something you can fix with short-term interest rates.”