Fed to combat virus disruptions

The Federal Reserve pledged on Wednesday to use its full range of tools to insulate the economy as coronavirus lockdowns sap economic growth and throw millions out of work, saying it would keep interest rates near zero until a recovery was well underway.

Fed Chairman Jerome H. Powell, speaking at a news conference immediately after the central bank’s two-day policy meeting, said the economy is suffering from the “forceful” steps the country has taken to slow the spread of the virus and said it remains unclear how long the economic stress will continue.

“The depth and the duration of the economic downturn are unknown,” Powell said, adding that “the burdens are falling most heavily on those least able to carry them.”

“Millions of workers are losing their jobs,” he said and “household spending has plummeted.”

The Fed, which slashed rates to near zero at two emergency meetings last month, left rates unchanged and suggested officials would not be raising rates anytime soon. Powell reiterated the central bank’s statement that it is “committed to using its full range of tools to support the U.S. economy in this challenging time.”

“The path of it is highly uncertain, but we will be there with our tools, supporting the economy and supporting that recovery,” he said.

But Powell acknowledged that low interest rates cannot solve an economic slowdown caused by a virus that has quarantined workers, sidelined millions of workers and shuttered business activity across the country.

“Lowering interest rates cannot stop the sharp drop in economic activity,” Powell said, as people are ordered to stay home and businesses remain closed.

While the Fed is using all its available tools, he said, the central bank can only lend money to keep credit flowing, not spend it in the way that fiscal policymakers are able.

“Elected officials have the power to tax and spend,” he said, suggesting that more direct support to those hardest hit by the crisis might be needed to help restart the economy.

Officials gathered virtually for their first regularly scheduled meeting since the crisis took hold in the United States. In addition to cutting rates, the Fed has been buying large quantities of government and mortgage-backed debt to keep critical markets functioning.

Officials have also unveiled a spate of emergency programs that either buy debt or lend money into critical sectors. Congress handed the Treasury Department

$454 billion to support the Fed’s programs, which need to be protected against credit losses. Officials have used that backing to push the Fed’s emergency lending powers further than they went even in the depths of the 2008 financial crisis: They plan to buy municipal debt and to help both large and midsize companies gain access to credit.

The efforts come as quarantines and stay-athome orders hurt economic growth. The economy contracted at a 4.8% annualized rate in the first quarter, the worst reading since 2008, as spending on services plummeted. That ended the longest U.S. economic expansion on record, but it probably only scraped the surface of the coronavirus damage, since lockdowns started toward the end of the quarter. Analysts expect the economy to shrink by 25% in the three months through June, based on the median in a Bloomberg survey.

The Fed, in its statement, suggested a long road ahead before recovery, saying “the ongoing public health crisis will weigh heavily on economic activity, employment and inflation in the near term” as well as “considerable risks to the economic outlook over the medium term.”

“They are giving some insight into how they see the trajectory for the economy, which is not a V-shaped path,” said Michelle Meyer, head of U.S. economics at Bank of America, specifically pointing to the mediumterm warning on growth. “They’ll keep interest rates low for a long time, they’ll err on the side of being more accommodative, rather than less.”

Powell outlined a somewhat bleak path ahead, saying second quarter economic data will be “worse” than anything previously seen and that it is hard to predict when a recovery might begin given uncertainties surrounding the virus. “Economic forecasts are always uncertain — today they’re unusually uncertain,” he said.

Even once people begin going back to work and economic activity resumes, Powell suggested a slow recovery ahead given ongoing concerns about contracting the virus.

“People will come out of their homes, start to spend again,” but “when will that be? It’s very hard to say.” He added that even once that happens “it’s unlikely that it would bring us” quickly back to pre-crisis levels” as people remain concerned about venturing out.