Fed's Bullard: Anyone pricing assets must consider the ‘tail risk’ that virus outbreak could ‘get much worse’ until it is contained

"The Chinese economy is expected to “slow noticeably” because of efforts taken to contain the coronavirus, with the impact already being felt in global bond markets, US Federal Reserve bank president James Bullard said on Tuesday.

“The efforts to bring the virus under control are substantial enough that the Chinese economy is expected to grow noticeably slower in the first quarter of 2020 than it otherwise would have,” Bullard said in remarks to the CFA Society in St. Louis. Recent declines in two-year Treasury note interest rates, he said, were “likely attributable to risk to the global economy from the coronavirus outbreak in China,” rather than, for example, to doubts about the US economy or other risks.

Additional comments

• Anyone pricing assets must consider the ‘tail risk’ that the virus outbreak could ‘get much worse’ until it is contained.
• Bullard says some room for optimism that US productivity growth will improve as technology spreads and becomes noticeable in data.

• Fed's Bullard: Recent declines in T-bond yields show impact of coronavirus

• Bullard says feels Fed policy as of now is "a little bit" accommodative.
• As of now, current Fed policy feels ‘a little bit accommodative’
• Bullard says rate normalzation of last couple of years will "pay dividends" as fed has scope to react to a downturn.

Market implications

The impact of the virus on China, the world’s second-largest economy, as well as its possible spread to other countries remains a wild card and was a focal point of Fed Chair Jerome Powell’s testimony Tuesday on Capitol Hill – more on that here: Powell speech: Too early to determine effect of coronavirus on US

However, gold and the yen has been picking up the flack but investors are shrugging off the risks, with US benchmarks printing all-time highs and gold and the yen back under pressure. We have seen some hopes that the spread of the novel coronavirus may be slowing in China supported sentiment. A cautious but upbeat assessment by Fed Chair Powell also supported markets.