By Michael S. Derby 

Federal Reserve Bank of St. Louis President James Bullard said Friday the coronavirus situation has opened the door to a central bank rate cut, but he still thinks the Fed won't need to take action if the health scare is contained, as he expects it will be.

Mr. Bullard also said that just because financial markets have broad expectations that the central bank will ease policy very soon, it doesn't mean the central bank is obligated to ratify those views with cuts to the central bank's target federal-funds rate.

"Further policy rate cuts are a possibility if a global pandemic actually develops with health effects approaching the scale of ordinary influenza, but this is not the baseline case at this time," Mr. Bullard said in materials prepared for a presentation in Fort Smith, Ark.

He told reporters after his speech: "I wouldn't want to prejudge the March meeting. Obviously, the situation is very fluid, and we are going to want to monitor events right up until the meeting." But he added, "Focusing on central banks is probably not the best idea here. The best idea is to focus on public health."

Mr. Bullard was a voting member of the Federal Open Market Committee in 2019 but isn't this year due to the annual rotation of regional Fed bank presidents. He was an early and strong supporter of rate cuts last year, and in his speech, he said the U.S. economy is still benefiting from that change in policy, which is also helping support the economy amid the current uncertainty and market woes.

The Fed "is in a good position because of previous policy rate cuts designed to insure the economy against adverse shocks," Mr. Bullard said in his speech. "Policy rate decreases have an effect on the U.S. economy with a lag, so last year's rate reductions are likely to continue to have an influence as the coronavirus tragedy unfolds," he added.

The futures market for the federal-funds rate now sees zero chance of a steady Fed at the March meeting. Compared with the current target-rate range of between 1.50% and 1.75%, the market put a 55% probability on a move to between 1.25% and 1.50% Friday morning, and a 45% probability on a bigger move down to between 1.00% and 1.25%.

It is rare for markets and the Fed to be so far out of alignment, especially with the next FOMC meeting looming into view on March 17 and 18. But so far, during the sharp stock market losses and general market upheaval, Fed officials haven't been ready yet to say more rate cuts are needed. Dallas Fed leader Robert Kaplan, an FOMC voter, said on Fox Business Network Friday that "I've said up to now I thought it was too soon to make a judgment, but I'll be prepared to make a judgment and have a judgment on what I think we ought to do as we go into the March meeting."

Speaking with reporters, Mr. Bullard laid out how he could see the Fed lowering rates in response to the coronavirus situation. "If you thought that this was going to slow U.S. growth materially this year, and the Fed took some action to try to bolster growth this year, then in that sense, we can react to this." But he noted that thus far there has been no big downgrade of the U.S. growth outlook.

Mr. Bullard took a cautious eye toward market developments and said that while plummeting bond yields are offering support to the economy, it isn't clear whether stock investors are overdoing it with their huge selloff.

Mr. Bullard told reporters investors are pricing in "a debilitating global pandemic. But I would encourage everyone to ask themselves, is that really the bet you want to make, that this will be a debilitating global pandemic?" He added, "Markets might be overestimating the probability of a global pandemic, but they are certainly free to bet as they wish." He also said he expects asset prices to recover as soon as it becomes clear the coronavirus situation is a transitory issue.

But he added that when it comes to whether investors have lost their bearings, "irrational is in the eye of the beholder. I think it's very legitimate markets want to take this seriously, they want to war-game out what could happen, and there is some serious downside risk here and they're trying to price that in."

In the speech, Mr. Bullard also said the very sharp decline in Treasury yields seen over recent days -- the 10-year note yield hit a record low as investors sought a safe place to park their money -- should also help buoy the economy. "Longer-term U.S. interest rates have been driven lower by a global flight to safety, likely benefiting the U.S. economy," he said.

The Fed lowered rates three times in 2019 as it sought to offset risks to the U.S. economy from trade policy uncertainty and slowing global growth. Mr. Bullard reiterated in his presentation that the shift in monetary policy by the Fed has had a stimulative impact beyond the actual scope of the rate cuts, given how other asset prices reacted. That stimulus is still affecting the economy and will help the U.S. navigate the current situation of uncertainty, he said.

Mr. Bullard acknowledged the uncertainty of the situation surrounding the coronavirus, which causes the illness Covid-19 and has already brought substantial disruptions to China's economy. "Global economic growth is likely to slow temporarily, with much of the slowdown centered in Asia," he said.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

February 28, 2020 12:32 ET (17:32 GMT)