Call the Coronavirus a short-term blip, perhaps, or a temporary shock.
But one that does not need policy moves by the Federal Reserve Bank.
In an interview with CNBC on Friday (Feb. 21), St. Louis Federal Reserve Bank President James Bullard said there remains a “high probability that the Coronavirus will blow over as other viruses have.”
He said the virus would prove to be a “temporary shock and everything will come back.” That refers in part to stock market volatility that saw markets down nearly a percent on Friday (as measured by the S&P 500 Index). Bullard signaled, too, that observers might not see the expected rate cut materialize.
He said that markets will have to price in the virus/recovery scenarios – and noted that “there’s a low probability that this could get much worse.” In the scenario that the virus impact proves temporary, the mindset is likely to return to the “on-hold scenario” that has the Fed staying the course on rates.
Bullard said during the interview that the U.S. economy is well-positioned for a “soft landing.” He noted that estimates of GDP growth for the first quarter of the current year are roughly 2 percent to 2.25 percent, and that even in the current environment, “we are not going to see a major impact on the U.S.”
Banks and a Changing Landscape
In reference to banks, Morgan Stanley said this week that it is buying E-Trade for $13 billion. Bullard said there should be competition in the space, and added, “I like them where they are – or smaller.” He said consolidation in the community banking segment is “3 to 4 percent a year, and it could accelerate.”
The conversation shifted to the Volcker Rule, which restricts banks from, among other things, proprietary trading. Generally speaking, with a nod to the concept of what a bank could “be” – how much trading it could undertake, for example, or what proprietary acquisitions it could make to add on to their businesses – Bullard said that “the cows are out of the barn on that. I do not think we are able to go back to anything that splits investment banking and commercial banking.”
Bullard pointed out the importance of vigilance in the banking sector, stating that “if you have plenty of them, you can let one fail and you’ll be okay.” He said that banking business models will continue to evolve to offset the impact of low interest rates on their margins.
When asked about risks within the financial realm, Bullard said, “I don’t see anything of the magnitude of the housing bubble. I do not see anything of the magnitude of the dot-com bubble.”