Fed sees dim outlook as virus squeezes US economy

Updated 30 Jul 2020

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Federal Reserve says US economy has rebounded from the depths of March and April. — AFP/File
Federal Reserve says US economy has rebounded from the depths of March and April. — AFP/File

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

In a statement at the end of its policy-making meeting on 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 coronavirus pandemic will weigh heavily on economic activity, employment and inflation.”

The Fed announced no new policies in its statement. The central bank 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 spur borrowing and spending.

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. Home sales have picked up after falling sharply in the spring. The housing rebound has been fueled by the lowest loan rates on record, with the average 30-year mortgage dipping below 3 per cent this month for the first time in 50 years.

With the economy struggling just to grow, small businesses across the country in serious danger and unemployment very high at 11.1pc, few investors expect the Fed to hike interest rates for perhaps years to come. After its previous meeting last month, the Fed had signaled that it expected to keep its key short-term rate near zero at least through 2022.

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 programmes to try to keep credit flowing smoothly.

Since the Feds previous meeting in June, the pandemics threat to the economy has appeared to worsen. The number of laid-off 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, far below pre-pandemic levels, 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 2008-2009 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.

Published in Dawn, July 30th, 2020