Fed's Mester: Coronavirus will weigh on US economic growth in the first half of 2020

The coronavirus outbreak muddied the outlook for US economy and could weigh on growth in the first half of this year, Cleveland Federal Reserve Bank President Loretta Mester said in London Tuesday.

Key notes

• Says it's hard to know how large and persistent the economic impact of coronavirus will be.
• Says coronavirus will weigh on US economic growth in the first half of 2020.
• Says it's hard to know how large and persistent the economic impact of coronavirus will be.
• Says virus could lead to a pullback in spending by households and businesses.
• Says supply shock from virus could evolve into a demand shock.
• Says Fed’s emergency rate cut could boost confidence and help indebted households and businesses.
•  Says will make future decisions on policy on a meeting by meeting basis, look at latest information on coronavirus.
• Says does not feel under political pressure on monetary policy.
• Says I am sceptical that negative rates would work well in united states.
• Says forward guidance will be an important tool if Fed reaches effective lower bound on interest rates, as will be QE.
• Says Fed policy last year was not a response to wobbles in the market, but risks around tariff policy.
• Says today's policy decision was about trying to mitigate risks to the outlook from coronavirus.
• Says lower rates should help business sentiment and investor and household sentiment.
• Says she hopes latest fed cut does not 'smack of panic,' we will do what we can from central bank toolkit to shore up confidence.
• Says travel in US has gone way down, social gatherings affected, having real impact on US economy.
• Says she is concerned some large US banks have started reducing capital levels, also weak underwriting standards for corporate debt.
• Says we cannot ignore market signals on coronavirus.

Market implications

The Federal Reserve to cut interest rates today in an emergency meeting by 50 basis points. We have seen unprecedented market volatility with the US 10-year yields falling to below 1% for the first time in history. The Fed could be doing more, even as soon as 18th March meeting, denting the US dollar in the knee jerk reaction. However, the greenback could be expected to attract a safe haven flow as a coordinated effort from central banks will likely see additional action from other central banks.