Nearly 2,700 people have died in China and its economy has been paralysed by lockdown measures imposed to try and halt the virus' spread. The outbreak of the new coronavirus in China adds another risk factor to the outlook, which otherwise seemed poised to provide steady growth, said Loretta Mester, president of the Federal Reserve's regional bank in Cleveland. As the shortest duration of so-called coupon debt - bonds with a maturity longer than a year - the 2-year note's yield reflects bond market investors' expectations for Fed policy. The benchmark S&P 500 index fell 3.4 per cent on Monday. "The fundamentals of the USA economy were solid in 2019 and continuing into 2020", Clarida said in an interview on CNBC. Those who have spoken have acknowledged the fluid and uncertain nature of events and have said they are watching the data for signs of how to react. Financial markets have booked big losses and futures markets now predict the Fed will lower rates at its March meeting, and cut again as the year moves forward.
A key issue is how the coronavirus impacts the economy.
She extra that executing so could deliver imbalances in the US economic climate and that the Fed should really be significantly attuned to money current market developments in the latest setting. "Today, the novel coronavirus is a material risk to the economy".
But with the virus spreading, it threatens to have a broader impact, Mann said. That won't be so easily made up. The 10-year Treasury yield is below the three-month yield, an inversion that many economists think can be a harbinger of recessions.
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Others argue that rate cuts could have a significant impact in part by preventing panic on Wall Street. Mester, a voting member of the Fed's interest rate setting committee this year, was relatively upbeat about the economy, which she said should continue to perform well with a strong job market and growth around two percent, slightly slower than last year.
And consumers won't necessarily spend more, even with lower rates, if they are waiting to see how the viral outbreak progresses, or if they are staying home out of fear.
Roger Ferguson, CEO of retirement services firm TIAA and former vice chair of the Federal Reserve Board of Governors, also raised doubts about the effectiveness of a cut.
Some analysts have said that interest-rate cuts could have limited power to fix economic damage caused by the coronavirus because lower rates - which are meant to encourage investment - can do little to open closed factories or encourage people to leave their homes.