Fed not likely to raise rate soon
It likely will remain near zero until at least 2022
Despite last week’s blockbuster jobs report, the Federal Reserve is showing no letup as it continues to respond aggressively to economic damage from the coronavirus pandemic that could linger for years.
The Fed on Wednesday held its key interest rate near zero and signaled it likely won’t lift it until at least 2022, noting the outbreak “will weigh heavily on economic activity” and “poses considerable risks to the economic
outlook.”
“We’re not even thinking about raising rates,” Fed Chair Jerome Powell said in a virtual news conference. “We’re not even thinking about thinking about raising rates.”
Revising its forecasts for the first time since December, the Fed predicted the economy will contract by 6.5% in 2020, marking its worst performance since the end of World War II, and unemployment will end the year at 9.3%.
Powell acknowledged the stunning 2.5 million May job gains revealed by the Labor Department last week as states began allowing nonessential businesses shuttered by the pandemic, such as restaurants and beauty salons, to reopen in phases.
“The May employment report was a welcome surprise, very pleased,” Powell said. “But it’s a long road.”
Stocks ended a bumpy day mostly
lower Wednesday despite the Fed’s assurances on rates. The Dow Jones industrial average fell to 282 points, or just over 1%, to end at nearly 26,990.
Although the employment rebound started a month sooner than anticipated, a record 22 million jobs were lost in March and April, wiping out all of the gains since the Great Recession of 2007-09. And while there are signs parts of the economy are reawakening, “Activity in many parts of the economy has yet to pick up,” Powell said.
In a statement after a two-day meeting, the Fed mentioned the stock market’s recent rally and easing credit conditions, which largely can be traced to forceful actions by the Fed and Congress.
But Powell said both the Fed and Congress can do more, with lawmakers better equipped to provide funding directly to households and businesses. Noting Congress already has passed an unprecedented $3 trillion in stimulus measures, he said, “Is it going to be enough? That is the question.”
In their median estimate, Fed policymakers indicated they expect the federal funds rate to stay near zero through their forecast horizon ending in 2022. All 17 officials forecast no rate hike next year and just two predicted higher rates by the end of 2022 – a near-unanimous estimate..
The Fed on Wednesday also said it will continue buying about $80 billion in Treasury bonds and $40 billion in mortgage-backed securities each month. The central bank had been gradually tapering down the purchases each week.
The Fed has bought more than $2 trillion in Treasuries and mortgagebacked securities to resuscitate markets for those assets that had frozen amid widespread fears. The purchases also have helped push down long-term rates for mortgages, corporate bonds and other loans.
And besides slashing its key rate to near zero, the central bank also has launched a flurry of extraordinary programs to provide financing in strained lending markets, including corporate bonds; small and midsize businesses; student, auto and credit card loans; and states and cities.
A snapshot of the Fed’s sharply downgraded projections:
The economy
Fed policymakers predict the economy will contract 6.5% this year before rising a healthy 5% next year and 3.5% in 2022. Still, Moody’s Analytics doesn’t expect the nation’s inflationadjusted gross domestic output – all the goods and services it produces – to return to its pre-pandemic peak until the second quarter of 2021.
After contracting at a 5% annual rate in the first quarter, GDP is set to plummet at a record 30% to 40% in the current quarter before mounting a strong but partial recovery in the second half of the year.
Although states are reopening, many consumers have said they’ll remain leery of visiting restaurants, stores, movie theaters and other gathering spots until a vaccine is widely available, possibly by mid-next year.
Jobs
Unemployment is projected to fall from 13.3% to 9.3% by the end of the year, 6.5% by the end of 2021, and 5.5% by the end of 2022, according to the Fed’s median estimate. But some perspective: In February, unemployment was at a 50-year low of 3.5%. While Moody’s expects the rate to continue falling, it doesn’t reckon it will edge below 4% for the foreseeable future.
The research firm figures the economy this year will recoup about half the jobs lost from the outbreak, and employment won’t return to its pre-pandemic level until late 2023. Many businesses are shutting down permanently despite trillions of dollars in government aid and as many as half of the laid-off workers aren’t likely to return to their former employers, economists say.
Powell acknowledged Wednesday that millions of workers likely won’t be able to return to their former jobs. Yet speaking of lasting damage to the economy, such as business closures and long-term unemployment, he said, “I think we can avoid most of that… What we’re trying to do is create an environment where (laid-off workers) have a better chance to go back to their old job, or a new job.”
“This is still more of a wish than a reality,” says Diane Swonk, chief economist of Grant Thornton.