Fed leaves rates near zero, sees virus-related risks lingering
WASHINGTON (Reuters) – The Federal Reserve on Wednesday left interest rates near zero and repeated a vow to use its “full range of tools” to shore up the U.S. economy amid an ongoing coronavirus pandemic that will not only slam growth in the near term but pose “considerable risks” in the medium term as well.
“We are doing all we can” to help American households and businesses weather the public health emergency, Fed Chair Jerome Powell told journalists at the end of a two-day policy meeting that was held via videoconference. He added that the novel coronavirus could threaten economic growth for another year.
“We will continue to use our tools to ensure that the recovery, when it comes, will be as robust as possible.”
For now, he said, monetary policy is calibrated appropriately, but added that could change. “It may well be the case that the economy will need more support from all of us if the recovery is to be a robust one,” Powell said.
In a matter of weeks the U.S. economy has gone from historically low unemployment to seeing more than 26 million people file for unemployment benefits and the sharpest plunge in activity since the Great Recession, as authorities across the country shut down large swaths of industry and commerce to slow the spread of the virus.
- Fed keeps rates steady, vows to maintain coronavirus measures
Gross domestic product declined at a 4.8% annualized rate in the first quarter, ending the longest expansion in U.S. history, the Commerce Department reported earlier on Wednesday.
Powell said he expects second-quarter GDP to shrink by double digits and for there to be significant increases in unemployment. It also will “take some time” for consumers to start spending again once the economy begins to reopen, he said.
In its statement the rate-setting Federal Open Market Committee sketched the extent of the pandemic’s effect so far, noting that “weaker demand and significantly lower oil prices are holding down consumer price inflation” and that “disruptions to economic activity here and abroad have significantly affected financial conditions and have impaired the flow of credit to U.S. households and businesses.”
The 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, adding that it “is committed to using its full range of tools to support the U.S. economy in this challenging time.”
“The more significant comment is that the FOMC is concerned about the downside risk to the economic outlook over the medium term, suggesting they will remain extraordinarily accommodative in policy for several years to come,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.
“When they stick their necks out and say they will use all their ammo, that’s a significant statement of support,” LeBas said.
U.S. stock markets pared some of the day’s strong gains after the release of the Fed’s statement before moving higher later in the session. The benchmark S&P 500 remained on track for its largest daily gain in nearly two weeks.
Yields on U.S. Treasury securities were little moved by the statement, while the dollar edged lower against a basket of key trading partner currencies.
The meeting was the first held by the Fed since it took emergency steps in March and April to stabilize financial markets, slashing interest rates to near zero and throwing a credit lifeline to businesses and local governments.
The Fed said it expects to maintain the target range for its benchmark overnight lending rate at the current 0% to 0.25% “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals,” the same phrasing it used in its last policy statement on March 15.
It also said it will continue to buy U.S. Treasuries and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth markets, and to offer large-scale overnight and term repurchase agreement operations.
Powell said the Fed will use its tools “forcefully proactively and aggressively.”
(Graphic: America’s pandemic safety net link: here)
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