Fed Focused on Coronavirus Fallout at January Meeting

WASHINGTON — Federal Reserve officials left interest rates unchanged at their January meeting as the economy grew steadily, but they spent their meeting reviewing risks to the outlook — including fresh concerns about the coronavirus that had begun to take hold in China.

Minutes from the Fed’s Jan. 28 and 29 meeting showed that officials called the new coronavirus “a new risk to the global growth outlook.” At the time, the outbreak had killed more than 100 people and sickened about 5,000. It has continued to spread since, causing more than 2,000 deaths and infecting more than 75,000 people.

Central bankers have been cautious about predicting how much the virus will affect the United States economy, though they have made it clear that they expect some spillover. Swaths of China have ground to a standstill as authorities try to contain the virus by shuttering factories and enforcing quarantines, disrupting trade and tourism. Factories across the nation are reopening, but haltingly.

The Fed is monitoring how the economic fallout in China bears on American growth and inflation.

“The question for us really is: What will be the effects on the U.S. economy? Will they be persistent, will they be material?” Jerome H. Powell, the Fed chair, told lawmakers while testifying last week. “We know that there will be some, very likely to be some effects on the United States. I think it’s just too early to say.”

Fed officials have signaled that they plan to leave policy unchanged as they wait to see how the economy shapes up in 2020. That patient stance comes after central bankers cut interest rates three times last year in a bid to insulate the economy against fallout from President Trump’s trade war and a slowdown abroad.

• Updated Feb. 10, 2020

  • What is a Coronavirus?
    It is a novel virus named for the crown-like spikes that protrude from its surface. The coronavirus can infect both animals and people, and can cause a range of respiratory illnesses from the common cold to more dangerous conditions like Severe Acute Respiratory Syndrome, or SARS.
  • How contagious is the virus?
    According to preliminary research, it seems moderately infectious, similar to SARS, and is possibly transmitted through the air. Scientists have estimated that each infected person could spread it to somewhere between 1.5 and 3.5 people without effective containment measures.
  • How worried should I be?
    While the virus is a serious public health concern, the risk to most people outside China remains very low, and seasonal flu is a more immediate threat.
  • Who is working to contain the virus?
    World Health Organization officials have praised China’s aggressive response to the virus by closing transportation, schools and markets. This week, a team of experts from the W.H.O. arrived in Beijing to offer assistance.
  • What if I’m traveling?
    The United States and Australia are temporarily denying entry to noncitizens who recently traveled to China and several airlines have canceled flights.
  • How do I keep myself and others safe?
    Washing your hands frequently is the most important thing you can do, along with staying at home when you’re sick.

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While an initial trade deal with China has alleviated some uncertainty that dogged America’s economy last year, tensions are not fully resolved. Beyond that, manufacturing remains slow and business investment is still weak.

“Participants generally expected trade-related uncertainty to remain somewhat elevated, and they were mindful of the possibility that the tentative signs of stabilization in global growth could fade,” according to the January minutes. Against that backdrop, they saw the current policy as “likely to remain appropriate for a time.”

Interest rates are currently set in a range between 1.5 and 1.75 percent. That is below the Fed’s longer-run estimate of where its rate will settle, and officials believe the current stance should give the economy a slight boost.

The Federal Open Market Committee’s next meeting will take place March 17 and 18 in Washington. Since the January gathering, Fed officials have consistently signaled that they remain comfortable leaving rates unchanged for now, unless an economic surprise knocks them off that course.

Policymakers also discussed the future of their bond-buying program at their meeting last month. The central bank has been snapping up $60 billion in Treasury bills per month since mid-October. Officials say the program is a technical fix meant to prevent a money market disruption that happened in September from repeating.

The Fed had just stopped shrinking its bond holdings, swollen by post-crisis stimulus programs, when rates in the obscure but important market for short-term lending between banks temporarily jumped. Officials concluded that they may have gone too far in draining reserves — deposits at the Fed — from the financial system, contributing to that cash crunch.

To fix the problem, they swelled their balance sheet holdings using a combination of short-term operations and bill purchases. Now, the size of those temporary programs is shrinking, and bill purchases are being used to make sure that reserves in the financial system stay at what the Fed considers an “ample” level.

Lorie Logan, who oversees the open market account at the Federal Reserve Bank of New York, said that conditions would support slowing Treasury bill purchases in the second quarter of this year.

“As reserves reached durably ample levels, we intend to slow our purchases to a pace that will allow our balance sheet to grow in line with trend demand for our liabilities,” Mr. Powell told lawmakers last week, meaning that the balance sheet would grow along with the economy.

Central bankers also discussed a longer-running problem at the January gathering: Inflation has remained below policymakers’ 2 percent goal even as the unemployment rate lingers near half-century lows and the economy grows steadily.

“A few participants stressed that the committee should be more explicit about the need to achieve its inflation goal on a sustained basis,” the minutes said. Several said that “mild overshooting” might help the Fed to reinforce that its goal is symmetric, meaning that officials want price gains to oscillate around 2 percent rather than hovering below that level.

If prices grow too slowly, it diminishes the central bank’s already-limited room to cut interest rates in a recession, since the federal funds rate incorporates price gains. As of December, the central bank’s preferred price index accelerated by just 1.6 percent.

While Fed officials are hopeful that inflation will rise toward its 2 percent target in 2020, they have expressed a similar optimism for years, only to repeatedly fall short.