The U.S. Federal Reserve signalled on Wednesday that the path back to prosperity is likely to be slower than the White House and the stock market would prefer.
The U.S. central bank, which wrapped up a two-day meeting, indicated it intends to keep its key interest rate pinned at its current level near zero through 2022 as it nurses an economy that will take years to recover its pre-pandemic levels of employment.
In comments during his press conference, Fed chair Jerome Powell said, “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates."
The Fed, which has already unleashed unprecedented amounts of support for the coronavirus-racked economy, announced no new initiatives, but took a reassuring tone, declaring in a policy statement largely unchanged from April that it remains “committed to using its full range of tools to support the U.S. economy.”
There was no mistaking its restrained outlook, though. The central bank warned again that “the ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risk over the medium term.”
Jobs numbers published last week had indicated an unexpected bounce in job creation and raised hopes for a vigorous and quick recovery. The Fed’s statement was effectively a warning to keep those high hopes in check.
The effects of the pandemic will linger, according to the economic projections that were published alongside the policy statement. They incorporate the individual forecasts of Federal Reserve policy makers, and were the first projections the Fed has provided since last December, before the novel coronavirus disrupted the U.S. economy.
The median forecast envisages a brutal 6.5-per-cent contraction this year in economic output. Gross domestic product is expected to bounce higher over the next couple of years, expanding 5 per cent next year and 3.5 per cent in 2022. “Nevertheless, that would still leave GDP below its pre-pandemic path,” noted Paul Ashworth, chief U.S. economist at Capital Economics, in a report.
The jobs market, too, is likely to remain well off its pre-pandemic exuberance, according to the Fed. Unemployment will average 9.3 per cent this year, according to the median Fed forecast. It is expected to fall to 6.5 per cent next year and 5.5 per cent in 2022.
While such levels would mark a vast improvement over the current 13.3-per-cent unemployment rate, they would still be well above the rate at the beginning of this year, when only 3.5 per cent of the labour force was jobless.
The stock market took the Fed news in its stride, with the benchmark S&P 500 losing half a percentage point on the day.
There is a wide gulf between the exuberance that has propelled stock prices higher over the past two months and the muted outlook of the Fed. However, the Fed’s dovish tone and pledges of continued low rates were reassuring to investors.
“What observers were looking for was the tone of the message and the hints the members [of the Fed Open Market Committee] were sending as to how aggressive they will be going forward,” Joel Naroff of Naroff Economic Advisors wrote in a note. “Put simply, it’s pedal to the metal [on stimulus] for quite a long time.”
The political repercussions may be more immediate. The Fed’s grim projections for 2020 cast more clouds over Donald Trump’s re-election chances in November and may re-ignite enthusiasm among Republicans for new rounds of spending to ensure the recovery is as strong as possible.
They may also spur discussions about what more the Fed can do. One possibility is yield curve control, in which the central bank would target interest rates on longer-run Treasury bonds instead of just short-term rates.
Mr. Powell "hinted in his post-meeting press conference that the Fed was seriously discussing imposing explicit caps on Treasury yields although, with those yields currently at very low levels, officials are in no rush to adopt such a policy,” Mr. Ashworth of Capital Economics wrote.
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