Newsletter: Coronavirus Spreads, Fed Holds Steady – Real Time Economics

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Investors Worry as Coronavirus Spreads
Stocks fell Thursday on fears that an increasingly severe outbreak of the coronavirus originating in central China may impact global growth prospects. So far, more than 7,700 people, mostly in China, have been infected and 170 individuals have died from the new virus since it was identified in December, Xie Yu and Caitlin Ostroff report.
Global businesses operating in China are closing stores, scaling back operations and restricting travel as the Chinese government races to control a virus that has now infected more people than severe acute respiratory syndrome, or SARS, did in the country nearly two decades ago. Large international companies are limiting travel to China, and airlines are suspending flights. Tens of millions of people in the country have been affected by government restrictions on movement, and U.S. workers returning from China are being asked by companies to work remotely for weeks at a time as a precaution. Some companies are starting to warn the virus will hit financial results, Micah Maidenberg reports.

WHAT TO WATCH TODAY
The Bank of England releases a policy statement at 7 a.m. ET, and Gov. Mark Carney holds a press conference at 7:30 a.m. ET.
Germany’s consumer-price index for January is out at 8 a.m. ET.
U.S. gross domestic product for the fourth quarter is expected to advance at a 2.1% pace from the prior quarter. (8:30 a.m. ET)
U.S. jobless claims are expected to rise to 215,000 from 211,000 a week earlier. (8:30 a.m. ET)
Japan’s industrial production and retail sales figures for December are out at 6:50 p.m. ET.
China’s official manufacturing index for January is out at 8 p.m. ET.
TOP STORIES
Holding Pattern
The Federal Reserve left its benchmark interest rate unchanged and reaffirmed its make-no-moves posture while it gauges how rate cuts last year cushioned the U.S. economy against a spell of weaker global growth. Fed Chairman Jerome Powell’s postmeeting comments suggested that lingering risks to the global economy and difficulty sustaining inflation at the Fed’s 2% target meant that if officials were to change rates, they would be more likely to cut them than to raise them. The Fed Wednesday offered a mixed assessment of the economic outlook, describing consumer spending growth as moderate, a downgrade from “strong” in December, and noting business investment had remained weak, Nick Timiraos reports.

What could cause the Fed to cut interest rates this year? Odds are, something beyond U.S. borders. Fed officials said they would monitor “global developments and muted inflation pressures” in deciding what to do next. Mr. Powell dwelt more on developments abroad than on U.S. growth. The economic indicators he is watching most closely are purchasing managers’ indexes of manufacturing activity in other countries, which have bottomed out but still aren’t in growth territory. “Then comes the coronavirus,” he said. The Fed has always monitored global developments, but in recent years they have moved from the periphery to the center. So if you want to know what the Fed does next, do as Mr. Powell does: keep your eye on the rest of the world, Greg Ip writes.

Don’t Bank on It
Banks don’t hold the key to climate change. Attendees at the World Economic Forum in Davos last week repeatedly heard that the path to a carbon-free future runs through the financial system. But for all its attractive symbolism, divestment isn’t going to shrink the fossil-fuel industry. Capital and oil are the world’s two most fungible commodities. Choke off one source of money—say, bank loans—and another will fill the void. Leave one deposit of oil and gas in the ground, and there are lots of others to exploit. The hard reality is that as long as demand for oil, gas and coal keep growing, supply will find a way to meet it. To slow climate change, the world must address fossil-fuel demand, not supply. That can be achieved only through difficult political decisions rather than public shaming, Greg Ip writes.

Not-So-New Nafta
President Trump signed legislation to implement the U.S.-Mexico-Canada Agreement, or USMCA, on Wednesday, fulfilling a key campaign promise to renegotiate North America’s economic infrastructure. At its core, USMCA is an amended, rebranded version of the North American Free Trade Agreement, which took effect in 1994, along with some newer provisions that the Obama administration had negotiated in a Pacific trade pact that Mr. Trump exited, William Mauldin and Alex Leary report.
“The intrinsic importance of the deal is not what it does to modernize Nafta, but rather what it prevents: a potentially-disastrous breakdown of trade between the U.S. and its most important trading partners. The net macroeconomic benefits of the deal will be negligible.” —Gregory Daco, Oxford Economics
Free Market, Iron Grip
Venezuela’s staunchly socialist leaders, battling to stave off economic collapse and hold on to power, are looking for a little help from an unlikely source: the free market. The country’s authoritarian president, Nicolás Maduro, who received political training in Cuba and publicly exalts the glories of socialism, has begun allowing companies to operate with a freer hand, according to business owners and economists. The shift, which comes after recent moves to remove price controls and allow U.S. dollars to circulate freely, has left factory operators, importers and store owners anxiously wondering whether Venezuela is moving, ever so slowly, toward a Chinese-like model of authoritarian capitalism—or whether Mr. Maduro is just temporarily giving the market a little freedom while the economy is under severe pressure from U.S. sanctions, Ryan Dube, Juan Forero and Kejal Vyas report.

WHAT ELSE WE’RE READING
The number of fatal drug overdoses in the U.S. declined for the first time in almost three decades. The latest reports from the Centers for Disease Control and Prevention are still bleak, with suicide rates ticking higher, opioid-related deaths up 10% from a year earlier and overdose deaths involving cocaine more than tripling from 2012 through 2018. Princeton economists Anne Case and Angus Deaton have labeled the surge in suicides and overdoses “deaths of despair,” caused partly by fading economic prospects.

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