The world economy could stumble into a recession if the coronavirus outbreak is not contained quickly, former White House economist Kevin Hassett warned on Friday.
Hassett, speaking in the midst of the worst week on Wall Street since 2008, expressed concern about the rapid spread of the coronavirus around the world, including in warmer-weather places like Iran.
“If people are able to spread it outside of the flu season, then this has legs through the summer and you’re absolutely looking at a recession globally,” Hassett, a CNN economics commentator, told CNN’s Poppy Harlow.
Asked if a recession in the United States is imminent, Hassett said it’s too early to say, but pointed out that first-quarter GDP growth is still likely to be positive.
“We’re right at that moment where we just don’t know,” Hassett said. “If a recession starts, it’s really got to start in the second quarter.”
Coronavirus fears have rocked financial markets. The S&P 500 has plunged 15% from record highs set just last week. Crude oil prices plummeted 6% Friday alone, underscoring the economic jitters. Investors piled into ultra-safe government bonds, driving the 10-year Treasury yield to all-time lows.
Investors predict Fed rescue
Hassett’s comments stand in contrast to ones made by his former colleague Larry Kudlow, director of the National Economic Council.
Speaking to reporters Friday, Kudlow said the fundamentals of the economy remain “strong” enough to offset the turmoil on Wall Street.
“I just don’t think this short-term stock market correction is going to have any effect,” Kudlow said.
Yet Janet Yellen, the former chair of the Federal Reserve, said Wednesday the spillover from global economic weakness could “throw the United States into a recession.”
The market mayhem has prompted calls for the Federal Reserve to take action. Kevin Warsh, a former governor at the Fed, urged global central bankers to take coordinated action.
Investors are predicting dramatic Fed action, the kind unseen since the 2008 financial crisis.
The market is now pricing in nearly a 50% chance of a half-a-percentage point rate cut, according to the CME FedWatch Tool. That’s up from zero percent just a day ago.
Inflation risks
Yet James Bullard, president of the St. Louis Fed, suggested in a speech Friday the Fed probably wouldn’t cut rates unless the outbreak escalates.
“Further policy rate cuts are a possibility if a global pandemic actually develops with health effects approaching the scale of ordinary influenza,” Bullard said, “but this is not the baseline case at this time.”
Yet others are urging the Fed to wait because rates are already extremely low and easy money won’t solve a health crisis.
Hassett said the Fed must also beware of the risk that the coronavirus causes a “supply shock” that ignites inflation, which has been largely subdued for the past decade.
“The little bit of stuff still being made has to be sold at a higher price,” Hassett said of supply shocks. “Against that backdrop, most people think the Fed needs to sadly just sit there and watch for a while.”
That won’t sit well with Wall Street, which has become accustomed to central bank rescues in response to market stress.
