IMF, US Government, Fed are Watching the Data, When They Should Be Listening to the Financial Markets

Are officials playing “kick the can” with the financial impact of the coronavirus on the global economy, or are we ready to say we’re going to see zero growth during the first quarter? And how long are we going to have to wait for predictions of a global recession? Two quarters?

I get that no one wants to cause a panic in the markets, but guess what, I think there will be, once the seemingly optimistic Federal Reserve policymakers finally have some negative data they can work with. By then it may be a little too late to rescue the second quarter.

After sounding too optimistic about the economy in 2018 and aggressively raising rates three times in 2019, they now appear to be a little stubborn about acknowledging there is a future economic downturn in the air.

Sometimes I feel that Fed members are more worried about predicting the length of an economic downturn than the actual start of economic problems. But now is the time to set aside track record worries like they were batting averages and make the call, even it is a tad early.

In this case, calling it a disaster early will be better than calling it too late. I don’t think anyone is going to be upset if the Fed makes a pre-emptive strike and makes an insurance rate cut a few months early. After all, investors are already pricing in at least one rate cut later in the year.

IMF:  We Don’t Know When It Will Happen, but We’ll Tell You What It Will Look Like

On February 19, International Monetary Fund (IMF) chief Kristalina Georgieva said the new coronavirus, or COVID-19, outbreak is the “most pressing uncertainty” facing, the world economy right now.

She further added it’s an international health emergency that “we did not anticipate in January” and “It is a stark reminder of how a fragile recovery could be threatened by unforeseen events.”

But then she went into optimistic mode and said, “If the disruptions from the virus end quickly, we expect the Chinese economy to bounce back soon, she wrote. “Spillovers to other countries would remain relatively minor and short-lived, most through temporary supply chain disruptions, tourism, and travel restrictions.”

February 19? This sounds like something she should have said in late January. Last week, Apple warned investors about reduced demand and supply chain interruptions. So I think the IMF is behind the ball.

To her credit, Georgieva did mention the IMF’s longer-term viewpoint, saying that a long-lasting outbreak would have significant consequences for the Chinese and global economies.

“Its global impact would be amplified through more substantial supply chain disruptions and a more persistent drop in investor confidence, especially if the epidemic spreads beyond China,” she said in a post.

Over the weekend, Georgieva started to acknowledge a worst case scenario, “But we are also looking at more dire scenarios where the spread of the virus continues for longer and more globally, and the growth consequences are more protracted.”

Economic Impact of Coronavirus Will Be Clearer in ‘Three or Four Weeks,’ Mnuchin Says

Meanwhile, U.S. officials will have a better idea of how the coronavirus outbreak will impact the economy in “three or four weeks,” U.S. Treasury Secretary Steven Mnuchin said Sunday.

“I think we’re going to need another three or four weeks to see how the virus reacts, until we really have good statistical data,” he said.

Mnuchin further added, “Although the rate of the virus spreads at is quite significant, the mortality rate is quite small. It’s something we’re monitoring carefully, one of the discussions we’re having here is that countries should be prepared, but I think we’re at a point where it’s too early to either say this is very concerning or it’s not concerning.”

Will check back with you, Mr. Mnuchin, in three or four weeks, to see what the markets seem to already know.

Fed Still Waiting on the Numbers

Last week, Federal Reserve Vice Chairman Richard Clarida reiterated that the “fundamentals in the U.S. are strong” though he said Fed officials are monitoring risks, in particular the coronavirus.

“It’s obviously something that is probably going to have a noticeable impact on Chinese growth in the first quarter,” he said. However, there’s no indication at this point that it will impact policy.

“What we would be looking for is some body of evidence that suggests that we need to make a material reassessment of our outlook, and certainly we have not done that yet,” Clarida said. “But we are monitoring, because China is a huge part of our economy.”

Conclusion

The IMF is not predicting an economic downturn per se, but seems to be telling us what one would look like in both the short-term and long-term. Mnuchin says we won’t know if there are going to be problems for three or four weeks and the Fed’s Richard Clarida says the economy is fine and the Fed is monitoring the situation.

In the meantime, the financial markets, especially U.S. Treasurys, gold, the Japanese Yen and to some extent, the global equity markets, seem to be saying the economic problems are already here.

Financial market investors were ahead of the Fed before in 2018 and central bankers made three cuts in 2019. I think they are right again so I expect the Fed to cut its benchmark rate sooner rather than later in 2020.