(C) Reuters. FILE PHOTO: U.S. Federal Reserve Chairman Jerome Powell speaks in Washington
By Howard Schneider and Lindsay (NYSE:LNN) Dunsmuir
WASHINGTON (Reuters) – The U.S. Federal Reserve on Wednesday signaled it would provide years of extraordinary support for an economy facing a torturous slog back from the coronavirus pandemic, with policymakers projecting a 6.5% decline in gross domestic product this year and a 9.3% unemployment rate at year’s end.
In the first economic projections of the pandemic era, U.S. central bank policymakers put into numbers what has been an emerging narrative: that the measures put in place to battle a health crisis will echo through the economy for years to come rather than be quickly reversed as commerce reopens.
The projections show the unemployment rate falling to 6.5% at the end of 2021 and 5.5% at the end of 2022 – a full 2 percentage points above where it was at the end of last year, representing millions of lost years of work.
“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 a policy statement after a two-day meeting.
The response: officials see the key overnight interest rate, or federal funds rate, remaining near zero through at least 2022. The decision to leave that rate unchanged on Wednesday was unanimous.
Officials also promised to maintain the Fed’s 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 – a sign the central bank is beginning to shape its long-run strategy for the economic recovery.
In remarks that acknowledged the nationwide protests against racial inequality that erupted in recent weeks, Fed Chair Jerome Powell said the central bank was committed to trying to restore jobs and growth to where they were.
“The work of the Fed touches communities and families and businesses across the country … We are committed to using our full range of tools … to ensure the recovery will be as robust as possible,” Powell said in a news briefing via a video link. “It is a long road. It is going to take some time.”
That rebound is expected to begin in earnest in 2021, with economic growth forecast at 5%.
On a positive note, the Fed did not mark down its long-run estimates of full employment, trend growth and the federal funds rate, a sign officials feel the country may escape permanent damage.
“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 were mixed in choppy trading. The benchmark S&P 500 index (SPX) was down 0.4% whereas the Nasdaq Composite was up 0.5% at a record high. Treasury security yields slipped and the dollar fell against the euro (EUR=) and yen .
The pledge to keep monetary policy loose until the U.S. 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.
But the projections are the first issued since December, and offer policymakers’ views on how fast employment and economic growth might recover, and an initial steer on how long interest rates will be pinned down.
Through most of last year U.S. central bankers felt they were in an enviable spot, with record low unemployment, tame inflation, and a strong expectation that both would continue.
But the pandemic, which has killed more than 112,000 Americans, has now thrown them into what may be a years-long fight to bring Americans back to work after some 20 million jobs were lost from March through May.
Fed vows to support U.S. economy’s ‘long road’ to recovery after dire 2020