US Federal Reserve vows to support US economy’s ‘long road’ to recovery after dire 2020
Hindustan Times
Dated: June 11, 2020
By: Prashasti Singh
The US Federal Reserve on Wednesday signaled it plans years of
extraordinary support for an economy facing a torturous slog back from the coronavirus
pandemic, with policymakers projecting the economy to shrink 6.5% in 2020 and
the unemployment rate to be 9.3% at year’s end.
In
the first economic projections of the pandemic era, US central bank
policymakers put into numbers what has been an emerging narrative: that the
shutdowns, restrictions and other measures used to battle a health crisis will
echo through the economy for years to come rather than be quickly reversed as
commerce reopens.
Some
20 million or more people have been thrown out of work since February, and Fed
Chair Jerome Powell acknowledged it could take years for them to all reacquire
jobs - an economic blow that is falling heaviest on minority communities at a
time when mass protests over police brutality have thrown a new spotlight on
racial inequality in the United States.
Powell, acknowledging the nationwide demonstrations in his opening remarks at a
news briefing, said it was now the Fed’s single-minded
mission to bring the job market back to where it was at the end
of last year, with the unemployment rate at a record low 3.5% and wage gains
accumulating for some of the very same lower-paid workers in the service sector
that have suffered most during the recent collapse.
“Twenty-two,
24 million people - somehow as a country we have to get them back to work,”
Powell said via video link after the end of the Fed’s latest two-day policy
meeting. “They did not do anything wrong. This was a natural disaster.”
“It
is a long road. It is going to take some time,” he said. “We can use our tools
to support the labor market and the economy and we can use them until we fully
recover.”
YEARS-LONG FIGHT
The
fresh policymaker projections start to show just how long that might take. At
the median, officials see the unemployment rate falling to 6.5% at the end of
2021 and 5.5% at the end of 2022 - still a full 2 percentage points above where
it was at the end of last year, representing millions of lost years of work and
wages.
“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 its policy statement.
The response has been an unparalleled level of unanimity in the outlook for
monetary policy. All 17 current Fed policymakers see the key overnight interest
rate, or federal funds rate, remaining near zero through next year, and 15 of
17 see no change through 2022.
Even
in the depths of the 2007-2009 financial crisis and recession some policymakers
raised a cautionary flag about the need for higher interest rates to guard
against inflation.
This
time that debate has disappeared. The Fed’s preferred measure of inflation is
expected to be a weak 0.8% this year, compared to the central bank’s goal of
2%, and rising to just 1.7% at the end of 2022.
At this point “we are not even thinking about thinking about raising rates,”
Powell said.
The
decision to leave the policy rate unchanged on Wednesday was unanimous. The
central bank also began shaping the longer-term measures it will use to keep
the recovery as strong as possible. Officials promised to maintain ongoing Fed
bond purchases at least at the current pace of around $80 billion per month in
Treasuries and $40 billion per month in agency and mortgage-backed securities -
levels that may be increased later, or supplemented with other strategies.
While
growth may resume this year, policymaker forecasts show the rebound beginning
in earnest in 2021, with economic growth for the year forecast at 5%.
Notably, the Fed did not mark down its long-run estimates of full employment,
trend growth or the federal funds rate, a sign officials feel the country may
escape permanent economic damage from a health crisis that has killed more
than 112,000 in a few months.
“Their
messaging is we are keeping rates low, but this is going to work, it is going
to get us there,” said Bruce Monrad, chairman and portfolio manager at
Northeast Investors Trust in Boston.
On
Wall Street, which had been near unchanged ahead of the Fed’s statement, stock
prices ended mixed. The benchmark S&P 500 index was down about 0.5% whereas
the Nasdaq Composite was up about 0.7%. Yields on US Treasuries slipped and the
dollar fell against a basket of currencies.
The
pledge to keep monetary policy loose until the US economy is back on track
repeats a promise made early in the central bank’s response to the coronavirus
pandemic.
That
response included cutting interest rates to near zero in March and making
trillions of dollars in credit available to banks, financial firms, and a wide
array of companies.
Powell
said that while much remains uncertain, particularly the progress of the
pandemic, the fiscal and monetary response has been working well so far,
maintaining income support for the unemployed and limiting business failures so
far.More
may be needed, he said.
“This
is the biggest economic shock in living memory,” Powell said. The response “has
been large, forceful and very quick ... In a class by itself.”
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