Fed leaves rates unchanged
Powell: Hike unlikely through at least 2022
WASHINGTON» The Federal Reserve on Wednesday said it would leave interest rates near zero for the foreseeable future as the central bank projected high unemployment for several years and a long slog back from the pandemic-induced recession.
In their first economic projections this year, Fed officials indicated that they expect the unemployment rate to end 2020 at 9.3% and remain elevated for some time, coming in at 5.5% in 2022. That would be well above the level they expect to prevail over the longer run in a healthy economy and far above the historically low jobless rates that preceded the virus.
“Many millions have lost their jobs,” Fed Chairman Jerome H. Powell said at a news conference following the Fed’s two-day policy meeting, adding the extent of the downturn and pace of the recovery remain “extraordinarily uncertain.”
Powell said the Fed will do “whatever we can, and for as long as it takes” to support the recovery and “limit lasting damage” to the economy.
That includes keeping rates near rock-bottom for the foreseeable future, Powell said, noting there likely would be no rate increase through at least 2022.
“We do think that this is going to take some time — I think most forecasters believe that,” Powell said.
The Fed is projecting a particularly sharp economic hit in 2020, with officials expecting output to contract by 6.5% at the end of this year compared to the final quarter of 2019, before rebounding by 5% in 2021.
The new forecasts predict a far slower path back to economic strength than the Trump administration — and perhaps the stock market — seems to expect as the economy climbs out of a virusspurred downturn. The Fed skipped its quarterly economic summary in March as the pandemic gripped the United States, sowing uncertainty as business activity came to a near standstill.
On Wednesday, it painted a grim picture of the path ahead, with millions remaining out of work for the next several quarters and gross domestic product embarking on a slow climb from its trough.
“The ongoing public health crisis will weigh heavily on economic activity, employment and inflation in the near term, and poses
considerable risks to the economic outlook over the medium term,” the Fed said in the post-meeting statement that accompanied the data outlook.
In addition to keeping borrowing costs low, the Fed pledged to continue buying governmentbacked debt “at least at the current pace” to sustain smooth market functioning, though they would “closely monitor developments” and were prepared to adjust those plans “as appropriate.”
The last time the Fed released projections was in December, when officials expected 2020 unemployment to close out at 3.5% with 1.9% inflation and 2% growth.
The coronavirus upended that outlook. Unemployment rocketed to 14.7% in April before easing to 13.3% in May. Economic activity tanked so sharply as states issued stay-at-home orders in March and April that the National Bureau of Economic Research announced this week that the United States entered a recession after the economy peaked in February.
The central bank’s release came hours after the Organization for Economic Cooperation and Development put out a report warning that the world economy faces the most severe downturn in a century and could experience a halting rebound.
“Extraordinary policies will be needed to walk the tightrope towards recovery,” said Laurence Boone, the OECD’s chief economist.
The Fed’s caution and the OECD’s pessimism contrasts with the more optimistic tone Treasury Secretary Steven Mnuchin took while testifying before senators on Wednesday. He said in prepared remarks that the economy was “well-positioned for a strong, phased reopening of our country,” though he noted during the testimony itself that some sectors had sustained “significant damage.”
And those messages are very different from the one coming from President Donald Trump, who has been celebrating as stock indexes rally. “NASDAQ HITS ALL-TIME HIGH. Tremendous progress being made, way ahead of schedule. USA!” he wrote on Twitter earlier Wednesday.
Powell has emerged as a voice of economic caution since the pandemic took hold. He has warned that both monetary and fiscal policy must stand ready to do more to make sure the pandemic does not permanently scar the economy, and he has been clear that the Fed does not mistake its early successes in calming markets and reinvigorating lending as giving an all-clear signal.
“While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risk,” Powell said May 13.
Since then, some data points have come in above expectations. Unemployment was projected to increase to around 20% but it declined instead. Consumer spending is rebounding, though it remains below its level before the virus, based on real-time trackers.
The central bank has taken extraordinary steps already to support the U.S. economy. The Fed cut interest rates to near zero in a series of back-to-back meetings in March. It has been snapping up government-backed bonds to keep markets functioning normally, and has rolled out a series of emergency credit programs aimed at ensuring that businesses and state and local governments can borrow money.