Coronavirus outbreak to cause Fed to take aggressive action: Goldman Sachs

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The coronavirus outbreak will take a bigger bite out of the U.S. economy than previously expected and force the Federal Reserve to take aggressive action, according to Goldman Sachs.

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Weaker-than-anticipated Chinese economic activity and the virus’s fast-spreading nature caused the firm’s economists to reduce their U.S. economic growth forecast. They now see growth slowing to 0.9 percent in the first quarter and 0 percent in the second quarter before rebounding to 1 percent in the third quarter and 2.25 percent in the fourth quarter.

“While the US economy avoids recession in our baseline forecast, the downside risks have clearly grown,” wrote Jan Hatzius, chief economist at Goldman Sachs.

CORONAVIRUS REACHING PANDEMIC MAY HURL US ECONOMY INTO RECESSION

The coronavirus, which originated in Wuhan, China, caused the lockdown of hundreds of millions of people in the country, leading businesses to temporarily halt or reduce operations.

As a result, a purchasing managers’ index of Chinese factory activity fell to 40.3 in February from 51.1 the prior month, according to Caixin. A separate report released Saturday by China’s National Bureau of Statistics showed a plunge to 35.7 from 50. The reading was the lowest on record.

Now that the damage to the Chinese economy is coming into clearer focus, Goldman is revising its views on how U.S. growth might be impacted. The firm had previously warned of three ways the U.S. economy would be impacted by the outbreak: weaker exports to China, a drop in Chinese tourism and retailers being impacted by supply-chain disruptions.

However, Goldman’s economists now expect the fallout to also cause supply-chain disruptions for U.S. producers and weigh on consumer spending.

“Tighter financial conditions, lack of cash flow at businesses that consumers avoid due to virus fears, and the layoffs that might result – could increase the economic blow,” Hatzius warned.

To cushion the economy, Goldman expects the Fed to cut its benchmark interest rate by 50 basis points at its March 18 meeting and by 25 bps at both its April and June meetings.

On Friday, Fed Chairman Jerome Powell reassured investors, saying the central bank is “closely monitoring developments” and will “act as appropriate to support the economy.”

The chairman's comments caused traders at the Chicago Mercantile Exchange to aggressively price in Fed actions. Fed fund futures traded at the CME are now pricing in a 100 percent chance the Fed cuts its key rate by 50 bps to a range between 1 percent and 1.25 percent by the conclusion of its March meeting.

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Traders see a 50 percent chance of another 25-basis point cut and a 36.4 percent probability of another 50 basis points in cuts by June.

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