As it prepares for this week’s policy meeting, the Federal Reserve has largely calmed turbulent financial markets but now must help rescue an economy and job market that appear to be in a free-fall. (April 28)
The Federal Reserve on Wednesday held its key interest rate near zero and vowed to continue taking aggressive action to combat the effects of a coronavirus pandemic that has set off an unprecedented economic downturn.
“The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals,” the Fed said at the outset of a statement after a two-day meeting.
Although the central bank has emptied much of its arsenal to prop up a reeling economy, the forceful assertion that it’s “committed” to deploying even more weapons suggests the Fed can do more if needed. In a statement last month, the Fed said it’s “prepared to use its full range of tools.”
Congress has set aside $454 billion for the Treasury that the Fed can use for additional lending programs. The Fed has used less than half of that money, which can be leveraged to a far greater amount in loans.
The Fed reiterated its pledge to keep rates at a range of zero to 0.25% “until it is confident that the economy has weathered recent events and is on track to achieve its” employment and inflation goals. Fed policymakers also said they’ll continue to buy Treasury and mortgage bonds “in the amounts needed” to support ailing financial markets.
The Fed downgraded its economic outlook in stark terms.
“The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world,” the Fed said. “The virus and the measures taken to protect public health are inducing sharp declines in economic activity and a surgeon job losses.”
Weak demand and lower oil prices also have put further downward pressure on inflation, the Fed added.
Fed Chair Jerome Powell is set to hold a virtual news conference at 2:30 p.m.
The Fed’s first scheduled meeting since January comes just hours after the Commerce Department reported that the U.S. economy contracted at an annual rate of 4.8% in the first quarter. It marks the first decline since 2014 and the steepest since late 2008 during the depths of the Great Recession and financial crisis.
But the brutal showing will likely be dwarfed by a projected 30% to 40% output drop in the current quarter, the largest in modern history, before an anticipated recovery begins in the second half of the year.
In March, the Fed lowered its benchmark federal funds rate by 1.5 percentage points to near zero and renewed its crisis-era purchases of Treasury bonds and mortgage-backed securities. The Fed so far has bought about $2 trillion in bonds to revive financial markets that had virtually stalled amid widespread fears.
The program – which has swelled the Fed’s balance sheet to a record $6.6 trillion, according to Oxford Economics — also has pushed down long-term interest rates, such as for mortgages. The Fed initially said it would buy $500 billion in Treasury bonds and $200 billion in mortgage securities but since has vowed to purchase as much as needed.
The central bank also has taken rapid-fire steps to provide financing for distressed lending markets, including corporate bonds; small and midsize businesses; student, auto and credit card loans; money market mutual funds; and states and cities.
Its initiatives represent an urgent response to an abruptly engineered shutdown of much of the U.S. economy to contain the spread of the virus.
Since mid-March most states have ordered closures of nonessential businesses, such as malls, restaurants, movie theaters and sporting venues. The travel and leisure industry already had come to a near standstill as Americans shunned airplane flights and hotel stays.
The business shutdowns, and their ripple effects on other industries, have led to massive job losses last seen during the Great Depression. About 26 million Americans have filed initial jobless claims, a reliable gauge of layoffs. The unemployment rate – which climbed from a 50-year low of 3.5% in February to 4.4% in March – is expected to soar to 15% to 20% in the second quarter.
With the outbreak starting to ease across much of the country, states such as Georgia, South Carolina and Tennessee have started to allow many businesses to reopen.
Besides the Fed actions, Congress has approved about $3 trillion in programs to try to minimize the damage. Among other measures, lawmakers have boosted unemployment benefits and eligibility, and offered forgivable loans that cover eight weeks of payroll and other costs for businesses with fewer than 500 employees that retain workers.
Assuming the pandemic continues to ebb and more businesses reopen by summer, the economy is expected to mount a strong recovery the second half of the year. But consumers are likely to remain wary until a vaccine is available, perhaps in a year, keeping the economy from returning to its pre-pandemic output level until late 2021, many economists say.
Goldman Sachs doesn’t expect the Fed to raise interest rates again until late 2023.
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