The Federal Reserve has signaled that it will keep its key short-term interest rate near zero for the foreseeable future as part of its effort to boost an economy that’s sinking into its worst crisis in decades. (April 29)
Citing the risk that the coronavirus crisis could result in a “prolonged recession and weak recovery” that leaves behind lasting damage, Federal Reserve Chair Jerome Powell on Wednesday said the Fed will deploy its tools “to their fullest” to “avoid these outcomes.”
Powell’s ominous tone is in stark contrast to his remarks early last month that the rebound can be “fairly quick” and “robust,” a shift that reflects the deep job and economic losses the pandemic already has inflicted and the growing prospect of a halting recovery.
“The record shows that deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy,” Powell said in a prepared speech he’s delivering at 9 a.m. ET at the Peterson Institute for International Economics. “Avoidable household and business insolvencies can weigh on growth for years to come. Long stretches of unemployment can damage or end workers’ careers as their skills lose value and professional networks dry up, and leave families in greater debt.”
He added that the loss of thousands of small and midsize businesses would limit the strength of the recovery and wipe out a major source of jobs.
“A prolonged recession and weak recovery could also discourage business investment and expansion, further limiting the resurgence of jobs as well as the growth of capital stock and the pace of technological advancement,” he said in the written remarks. “The result could be an extended period of low productivity growth and stagnant incomes.”
The Fed, he added, is prepared to act.
“We ought to do what we can to avoid these outcomes, and that may require additional policy measures,” Powell said. “At the Fed, we will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well underway.”
Noting that the Fed can lend but not spend money, he urged Congress to provide “additional fiscal support.”
Powell’s darker tone follows recent reports of the unprecedented toll the coronavirus has taken on the economy. A record 20.5 million jobs were lost in April as unemployment jumped from 4.4% to 14.7%, the Labor Department said last week. And after the economy contracted at a 4.8% annual rate in the first quarter, a record 30% to 40% plunge in output is expected in the current quarter.
Meanwhile, Powell noted the “path ahead is both highly uncertain and subject to significant downside risks,” adding that the “virus rate is a new set of questions.”
“How quickly and sustainably will it be brought under control? Can new outbreaks be avoided as social distancing measures lapse? How long will it take for confidence to return to normal spending to resume? And what will be the scope and timing of new therapies, testing or a vaccine?”
Most states issued stay-at-home orders and shut down nonessential businesses in mid-March to stem the spread of the coronavirus.
With more than 40 states starting to gradually reopen, the economy is expected to rebound solidly in the second half of the year. But consumers are likely to remain wary at least until a vaccine is available, possibly next year, and output and employment are likely to remain below pre-crisis levels through 2021 and possibly beyond.
“At the Fed, we have also acted with unprecedented speed and force,” Powell said.
Since mid-March, the central bank has slashed its key interest rate to near zero and purchased more than $2 trillion in Treasury bonds and mortgage-backed securities to revive financial markets that had stopped working properly amid widespread fears. The purchases also have pumped cash into the banking system and lowered long-term interest rates to help households and businesses.
And the Fed has taken a whirlwind of extraordinary steps to make more funding available for corporations; small and midsize businesses; student, auto and credit card loans; money market mutual funds; and state and city governments.
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