One year since emergency action, Fed readies for boom
In March 2020, as the coronavirus pandemic seized the global economy, the Federal Reserve convened an emergency meeting and announced its most dramatic move since the 2008 financial crisis: Slashing interest rates and buying up hundreds of billions of dollars in bonds. Shutdowns froze the American economy, and millions of jobs vanished within a matter of weeks.
One year later, the challenge before the Fed could not be more different. The economy, by almost all projections, is headed for a historic boom, buoyed by two recent stimulus packages and hopes that all adults will be eligible for a vaccine by May 1.
As the Fed wraps up two days of policy meetings on Wednesday, the recovery still has a long way to go. Some 9 million jobs, and likely more, are still missing from the labor force. Entire industries, like hospitality and entertainment, can’t be revived until the pandemic is under control.
The Fed is not expected to raise rates or pair back its asset purchases on Wednesday, a sign that the economy has yet to heal.
Rather, Federal Reserve Chair Jerome Powell is facing a delicate challenge: Convincing Wall Street that while there may be a shortterm increase in prices as people spend their new stimulus money, it will not lead to widespread or persistent inflation.
“It’s not that the Fed hasn’t tried” to relay this message,wrote Cornerstone Macro’s Roberto Perli and Benson Durham in a Tuesday analyst report. But “It’s hard for investors to ignore decades of experience and take the Fed at its word that it really has changed. . . . We suspect it will take evidence that the Fed won’t raise rates in the face of rising inflation to fully persuade investors.”
Powell is scheduled to speak at a 2:30 p.m. ET press conference after the Fed releases its latest crop of economic projections, including those for the unemployment rate, inflation and GDP growth over the next few years.
Those estimates are expected to be much-improved compared with the last time Fed leaders released projections in mid-december, when the outlook for the economy and public health crisis was much different. Holiday-season travel sent COVID cases surging. And it was unclear whether Congress and the Trump White House would pass another stimulus package, even as Powell repeatedly urged for much fiscal spending.
Trump ultimately signed a roughly $900 billion relief package days after Christmas. And just last week, President Joe Biden signed the $1.9 trillion COVID relief bill into law - the result of Democrats’ push to go big on a relief package.
That latest package - known as the American Rescue Plan - drastically changed economists’ expectations of how quickly the economy can return to its pre-pandemic strength. Goldman Sachs is now forecasting U.S. GDP to grow 8 percent this year in the fourth quarter compared to the same period a year ago , marking the fastest increase in almost 60 years. Major companies, including American Airlines and United Airlines, said that they would cancel tens of thousands of planned layoffs.
After the signing of the American Rescue Plan, Treasury Secretary Janet Yellen said she expected the country “could reach full employment by as soon as next year.”
At the same time, the flood of cash from the latest stimulus bill has some economists warning that such precipitous growth could harm the economy by kickstarting a dangerous cycle of inflation. Their concern is that the economy will overheat and prices will rise, forcing the Fed to raise interest rates and risk another recession.
Wall Street is also betting on soaring economic growth. Bond yields have risen sharply over the last month, which some investors see that as evidence that inflation is likely to materialize. According to the latest Bank of America survey of global fund managers, COVID is no longer the biggest “tail risk.” Higher than expected inflation is.
Powell and other Fed leaders say there’s no reason to expect inflation will spiral out of control. It’s possible there could be “some upward pressure on prices,” Powell said last month, as Americans receive stimulus aid and gradually return to normal life.