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Fed’s Bullard: China to ‘slow noticeably’ in first quarter due to virus

ST. LOUIS (Reuters) – The Chinese economy is expected to “slow noticeably” because of efforts taken to contain the coronavirus, with the impact already being felt in global bond markets, U.S. Federal Reserve bank president James Bullard said on Tuesday.

“The efforts to bring the virus under control are substantial enough that the Chinese economy is expected to grow noticeably slower in the first quarter of 2020 than it otherwise would have,” Bullard said in remarks to the CFA Society in St. Louis.

Previous diseases outbreaks have had a “tangible” impact on U.S. bond yields that lasted until the virus is “clearly contained,” Bullard noted, and the same appears to be happening today.

Recent declines in two-year Treasury note interest rates, he said, were “likely attributable to risk to the global economy from the coronavirus outbreak in China,” rather than, for example, to doubts about the U.S. economy or other risks.

The spread and persistence of the virus has become a central topic at the Fed, emerging as an unexpected risk in an economy that was otherwise doing well.

Bullard said, in fact, he felt the Fed’s rate cuts of last year had set the stage for a “soft landing” from the high growth of 2018, allowing the economy to cool back to its roughly 2% trend without a deeper slowdown or recession.

There were, he said, signs that those rate cuts were starting to be felt in industries like housing, while the easing of global trade tensions may now encourage a rebound in global manufacturing.

“The current baseline outlook for 2020 suggests a reasonable chance that a soft landing will be achieved,” Bullard said.

The impact of the virus on China, the world’s second-largest economy, as well as its possible spread to other countries remains a wild card – a focal point of Fed Chair Jerome Powell’s testimony Tuesday on Capitol Hill.

In a chart presented to the group, Bullard showed that during prior outbreaks of SARS, Ebola and other diseases, 10- year note yields fell as much as half a percentage point for a matter of weeks – but had begun to revert roughly a month after the outbreak.

(Reporting by Howard Schneider; Editing by Andrea Ricci)