Fed sees bleak outlook as virus squeezes economy

WASHINGTON — The Federal Reserve expressed concern Wednesday that the viral outbreak will act as a drag on the economy and hiring in the coming months and said it plans to keep its benchmark short-term interest rate pegged near zero.

In a statement at the end of its policymaking meeting Wednesday, the Fed acknowledged that the economy has rebounded from the depths of March and April, when nearly all states closed down nonessential businesses. But it said the ongoing COVID-19 pandemic “will weigh heavily on economic activity, employment and inflation.”

The Fed announced no new policies in its statement. It said it will also continue to buy about $120 billion in Treasury and mortgage bonds each month, which are intended to inject cash into financial markets and to spur borrowing and spending.

“Economic activity and employment have picked up somewhat in recent months,” the Fed’s statement said, “but remain well below their levels at the beginning of the year.”

In one of the few changes from their previous statement in June, the Fed policymakers added: “The path of the economy will depend significantly on the course of the virus” — an acknowledgement that uncertainty about when the health crisis might be solved has complicated the Fed’s ability to set interest rate policy.

It’s an observation Fed Chair Jerome Powell made, in one way or another, for months as most states have succeeded only fitfully in controlling the virus and the ability of businesses to stay open.

“A full recovery,” Mr. Powell said at a news conference, “is unlikely until people are confident that it is safe to engage in a broad range of activities.”

In the meantime, he said, “We are committed to using our full range of tools to support the economy.”

The Fed’s overall message that it would keep rates low indefinitely was widely expected by investors, and reaction in financial markets was muted. Stocks maintained their gains, and Treasury yields held steady.

Economists say the Fed has time to consider its next policy moves because short and long-term rates remain historically ultra-low and aren’t restraining economic growth.

With the economy struggling just to grow, small businesses across the country in serious danger and unemployment very high at 11.1%, few investors expect the Fed to hike interest rates for perhaps years to come.

Beginning in March, the Fed has slashed its short-term rate, bought more than $2 trillion in Treasury and mortgage bonds, and unveiled nine lending programs to try to keep credit flowing smoothly.

Since the Fed’s previous meeting in June, the pandemic’s threat to the economy has appeared to

worsen. The number of laidoff workers applying for unemployment aid has exceeded 1 million for 18 straight weeks. Measures of credit card spending have declined. And companies that track small-business employment say the number of people at work has leveled off after having risen in May and June.

Most analysts say they think the Fed’s next move will be to provide more specific guidance about the conditions it would need to see before raising its benchmark short-term interest rate from zero.

Economists call such an approach “forward guidance,” and the Fed used it extensively after the 2008-09 recession. Some Fed watchers expect no rate increase until 2024 at the earliest given the bleak outlook for the economy and expectations of continued ultra-low inflation.

But by providing more certainty for investors about when a rate hike may occur, forward guidance can help keep longer-term rates lower than they might otherwise be.

The Fed will likely provide such guidance at its next meeting in September, economists say.

According to the minutes of their June meeting, “various” Fed officials felt it would “be important in the coming months ... to provide greater clarity” about the future path of rates.

One potential form of forward guidance would be for the Fed to announce that it won’t raise rates until annual inflation has reached or exceeded its target of 2% for a specific period. This would be intended to allow inflation to rise above 2%, to offset inflation that has fallen below that target nearly continuously since 2012. (Inflation is now running at just 0.5%, according to the Fed’s preferred gauge.)

In recent speeches and appearances, Fed policymakers have sounded largely pessimistic about the economy.

Several, including Mr. Powell, warned in late May, as many states began allowing more businesses to reopen, that a resurgent virus could imperil any recovery.