Washington: The Federal Reserve signalled Wednesday that it will keep its key short-term interest rate near zero for the foreseeable future as part of its extraordinary efforts to bolster an economy that is sinking into its worst crisis since the 1930s.
As part of its emergency steps, the Fed said it will also keep buying Treasury and mortgage bonds to help keep rates low and ensure that companies can lend easily to each other amid a near-paralysis of the economy caused by the coronavirus.
It did not specify any amounts or timing for its bond purchases.
At a news conference, Chairman Jerome Powell cautioned about any prospects for a swift or a robust economic recovery, saying, "I would say that it may well be the case that the economy will need further support from all of us if the recovery is to be a strong one."
Powell suggested that given the depth of the US economic catastrophe, with perhaps 30 million people having lost jobs in the past six weeks, it will "probably will take some time for us to get back to a more normal level of employment and ultimately maximum employment."
The chairman and the Fed itself sought to provide reassurance, though, that their aggressive intervention could help mitigate the vast damage to the economy and to millions of workers.
In its statement, the Fed said it is "committed to using its full range of tools to support the US economy in this challenging time. The viral outbreak and measures to contain it," the statement noted, are inducing sharp declines in economic activity and a surge in job losses.
Under Powell, the Fed is confronting a deeply perilous moment for an economy that had looked robust just a few months ago. Since the virus struck with full force last month, widespread business shutdowns have caused roughly 30 million workers to lose jobs. As layoffs mount, retail sales are sinking, along with manufacturing, construction, home sales and consumer confidence.
In its statement, the Fed also raised concerns about slowing inflation, which is likely to sink further below its 2 per cent target level in the coming months.
"Weaker demand and significantly lower oil prices are holding down consumer price inflation," the statement said.
During two emergency meetings in March, the Fed cut its benchmark rate to a range between zero and 0.25%. It has also announced nine new lending programs to pump cash into financial markets and provide support to large and medium-sized businesses as well as cities and states.
The Fed's statement provided no additional details about its actions. It said it will keep its rate at nearly zero until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. That's the same language it used in its previous statement last month.
Nor did the Fed provide details about the pace of its purchases of Treasurys and mortgage-backed securities. It has tapered those purchases recently as markets have calmed. But earlier this month, it bought as many Treasury securities in a day as it did during an entire month in the 2008-2009 Great Recession.
The Fed's statement came on the same day that the Commerce Department released grim news about the economy: Economic output shrank at a 4.8% annual rate in the first three months of the year the worst showing since the Great Recession struck near the end of 2008.
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The economic picture is expected to grow ever darker, with the economy forecast to contract at a shocking 30% to 40% annual rate in the April-June quarter. The unemployment rate could reach 20% when April's jobs report is released next week.
The central bank has already slashed its benchmark interest rate to near zero and escalated its purchases of Treasury and mortgage-backed securities to pump cash into financial markets to smooth the flow of credit. It has also said it will buy corporate bonds and lend to states and cities two actions it has never previously taken.
The fact that they are operating in those markets is unprecedented," said Nathan Sheets, chief economist at PGIM Fixed Income and a former director of international finance at the Fed. They are coming up on the extent of their legal authorities here.
Yet this crisis is unlike any other, and it comes against a backdrop of horrific economic data. More than 26 million Americans have sought unemployment benefits since the viral outbreak shuttered much of the U.S. economy in mid-March.
As economic activity has collapsed, inflation has also begun to fall. Economists expect it to drop below 1% by next year, far under the Fed's 2% target level. That poses another problem for the Fed: Declining prices can eventually lead consumers to delay spending, thereby slowing the economy further.
Economists agree: No quick rebound from recession is likely
Devastated by the coronavirus, the US economy is sinking. And the plunge is accelerating.
Now, as some businesses in a few states start to trickle back to work, hopes are beginning to arise that the economy, damaged as it is, might be poised to rebound by the second half of the year. If more employees and consumers were to gradually return to working and spending, the idea goes, the economy might be able to mount a sharp comeback.
Yet most economists have the same response: Keep such expectations in check.
Among their concerns is that the coronavirus could flare up again after the economy is re-opened, forcing reopened businesses to shut down again. Another is that people employees and consumers alike will remain too wary of contracting the coronavirus to return to anything resembling normal economic behaviour. If that were the case, no meaningful economic recovery would likely take hold.
The virus has done a lot of damage to the economy, and there is just so much uncertainty now, said Mark Zandi, chief economist at Moody's Analytics.
The Commerce Department said that the gross domestic product, the total output of goods and services, posted a quarterly drop for the first time in six years. And it was the sharpest fall since the economy shrank at an 8.4% annual rate in the fourth quarter of 2008 in the depths of the Great Recession.
The longest U.S. economic expansion has ended, said Gregory Daco, chief economist at Oxford Economics.
Daco predicted that the recession will cause a drop in output that will be three times the size of the economic decline during the Great Recession, which got that name because it was the worst economic slump since the Great Depression of the 1930s.
Zandi said he thought any prospects for a recovery will hinge on the eventual availability of a coronavirus vaccine. He doesn't expect the economy to regain its footing on a sustained basis until perhaps mid-2021 and that assumes that a vaccine would be ready for use by then.
I would characterize this period as going through quicksand until we get a vaccine, Zandi said.
In just a few weeks since mid-March, businesses across the country have shut down and laid off tens of millions of workers. Factories and stores are shuttered. Home sales are falling. Households are slashing spending. Consumer confidence is sinking.
The GDP report showed that the weakness was led by plummeting consumer spending, which accounts for 70% of economic activity. Consumer spending tumbled at an annual rate of 7.6% in the first quarter its steepest decline since 1980.
Business investment sank 8.6%, with investment in equipment falling 15.2%.
The Commerce Department's report was its first estimate of GDP for the January-March quarter. It will issue two updated estimates in the coming weeks.
As the economy slides into what looks like a severe recession, the Trump administration continues to promote the notion that a recovery will arrive quickly and robustly once the health crisis has been solved what some call a V-shaped recovery.
But economists suggest that many Americans could remain too fearful to travel, shop at stores or visit restaurants or movie theaters anywhere near as much as they used to.
In addition, local and state officials may continue to limit, for health reasons, how many people may congregate in such places at any one time, thereby making it difficult for many businesses to survive. It's why some economists say the damage from the downturn could persist far longer than some may assume.
The Trump administration takes a rosier view. President Donald Trump told reporters this week that he expects a big rise in GDP in the third quarter, followed by an incredible fourth quarter, and you're going to have an incredible next year.
(AP Report)
