Federal Reserve Chairman Jerome Powell warned Tuesday that the U.S. economy faces a deep downturn with “significant uncertainty” about the timing and strength of a recovery. (June 16)

AP Domestic

As COVID-19 surges across much of the country and many states pause or roll back plans to reopen their economies, the Federal Reserve is renewing its promise to help bolster the wavering recovery.

Although noting the economy has “picked up somewhat,” the Fed on Wednesday kept its key short-term interest rate near zero and repeated its vow to use “its full range of tools to support the economy in this challenging time.”

In a statement after a two-day meeting, the central bank said it expects to keep its federal funds rate near 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.”

The Fed did give a nod to recent strong gains in jobs and economic measures such as retail sales.  “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year.”

The central bank also highlighted the economic uncertainty and risks inherent in the pandemic. 

“The path of the economy will depend significantly on the course of the virus,” the Fed added. “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 statement largely mirrors the version released in June and includes no policy changes. But many economists expect that by a mid-September meeting Fed officials will modify how they view inflation, a shift that could keep the benchmark rate at rock bottom even longer than anticipated. In June, policymakers signaled they’re likely to maintain a near-zero rate at least through 2022.

In coming weeks, the Fed also may adjust its purchases of Treasury bonds and mortgage-backed securities, nudging already meager long-term rates even lower.  

Fed Chair Jerome Powell could hint at such changes at a virtual news conference scheduled for 2:30 p.m.

Since the Fed’s last meeting, the Labor Department reported that the economy added a record 4.8 million net jobs in June, including both layoffs and new hiring. That, combined with May’s 2.7 million payroll gains, means that about a third of the 22 million jobs shed in March and April have been recovered.

Although the Commerce Department on Thursday is expected to report a record 35% annualized drop in economic output in the second quarter, a strong partial rebound has been anticipated in the second half the year as states continue to allow shuttered businesses to reopen.

But the pandemic has surged anew in many states, including several in the South and West that let businesses reopen early, threatening to dampen the upswing and possibly topple the nation into a second recession, economists say. The number of shifts worked in the U.S. fell last week for the first time in a non-holiday period since mid-April, according to Kronos, which provides workforce management software. Oxford Economics, citing recent Census Bureau data, says the July employment report could show millions of job losses.

In a sign the Fed doesn’t expect the economy to bounce back swiftly, it announced Tuesday that a flurry of programs to provide financing in strained lending markets – such as for corporate bonds, car purchases and small businesses – would be extended through Dec. 31 instead of expiring Sept. 30. The Fed on Wednesday also said it’s extending liquidity swaps with foreign central banks through March 2021, a move aimed at making it easier for them to lend to their financial institutions in U.S. dollars during a time of stress.  

Compounding the angst, Congress is at an impasse over another stimulus package that’s likely to extend at least part of a $600 weekly supplement to state unemployment benefits and send another round of $1,200 checks to individuals and $2,400 to couples.

Uncertainty over the legislation and the course of the virus is helping keep the Fed in wait-and-see mode, at least for now, Morgan Stanley wrote in a note to clients. By September, however, the Fed could take a more aggressive approach to jolting the economy.

The central bank already has been reviewing its monetary policy tools broadly and is expected in coming months to revise its 2% annual inflation goal by aiming for “average” inflation of 2% over time. Since inflation has been stuck below 2% for years, that suggests policymakers will keep rates low enough to let inflation run above 2% for a period of time to make up for the low-inflation years. That would ensure the public expects 2% inflation over the long run, Goldman Sachs says.

By a meeting in September, or possibly November, the Fed could announce that change and promise to keep rates near zero until the economy returns to full employment and inflation reaches 2% over the long term, paving the way for above-2% yearly price increases in the short run. Such a vow likely would keep the Fed’s key rate near zero until about 2025, Goldman says.

The Fed also could take steps to push long-term rates lower. The central bank has been buying $80 billion a month in treasury bonds and $40 billion in mortgage-backed securities, chiefly to revive markets for those assets that had frozen amid widespread fears during the crisis.

Soon, the Fed could more explicitly state that the purchases are now intended to push long-term rates, such as for mortgages, even lower to stimulate the economy. That likely would prompt the Fed to purchase more bonds with longer-term maturities.

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