March 4, 2020 / 10:08 AM / a month ago

Fed's Mester says coronavirus uncertainty could lead to demand shock - CNBC

(Reuters) - Cleveland Federal Reserve President Loretta Mester said on Wednesday the supply shock induced by the coronavirus could have demand side implications, if uncertainty on its impact continues.

FILE PHOTO: Cleveland Federal Reserve Bank President Loretta Mester poses during an interview on the sidelines of the American Economic Association’s annual meeting in San Diego, California, U.S., January 3, 2020. REUTERS/ Ann Saphir

Mester said in an interview here with CNBC that she supported the central bank's decision to cut interest rates by 50 basis points on Tuesday, adding that the risks around the outlook had risen significantly.

“There’s still a lot of uncertainty about the course of the virus and what impact it’ll have,” Mester said.

“This (rate cut) was really in response to the economy and the outlook and the risks around the outlook.”

Mester, who assumes a voting role this year on the Fed’s policy-setting committee, said the problem induced by the coronavirus is a case of “classic supply shock.”

“Certainly lowering interest rates are not going to get people to start traveling again, their social interactions are not going to be changed by a lower interest rate,” she said.

The situation could morph into something that may affect business, consumer and investor sentiment, Mester added.

The Fed’s decision to slash rates to a target range of 1.00% to 1.25% was the first unscheduled cut since 2008, at the height of the financial crisis.

Fed Chair Jerome Powell on Tuesday reiterated his view that the U.S. economy remains strong, but said the spread of the virus had caused a material change in the U.S. central bank’s outlook for growth.

Mester also warned that the supply shock created by the virus could lead to an increase in inflation.

The coronavirus outbreak, believed to have originated in the Chinese city of Wuhan, has spread around the world, infecting nearly 93,000 people globally as of March 3.

Reporting by Shubham Kalia in Bengaluru; Editing by Uttaresh.V and Vinay Dwivedi

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