The Federal Reserve signaled Wednesday that it would likely keep interest rates near zero until 2022 – an indication that central bank policymakers see a long road to recovery from the economic collapse caused by the coronavirus pandemic.
The Fed voiced an encouraging note about improving financial conditions and predicted that the economy would make a big loss next year. But officials in general do not expect the country to return to full employment until after 2022.
The Fed’s unemployment projections remain more positive than the latest estimates from the Congressional Budget Office and many private analysts, perhaps reflecting Friday’s shock employment report for May. That shows a large increase in employment and a decrease in the unemployment rate, to 13.3% from 14.7% in April.
President Trump raised the good work news as proof that the economy would soon roar again, and some on Capitol Hill questioned whether additional pandemic assistance was needed.
The prospect of the Fed “could take some steam out of those who are arguing for a V-shaped recovery,” said Christopher Rupkey, chief financial economist at MUFG Bank, referring to the relatively fast and complete rise from the decline.
The Fed has worked hard to stabilize financial markets, and its statement Wednesday reaffirmed its promise to keep interest rates low, continue to buy large-scale bonds and operate various loan programs as long as necessary.
Fed Chair Jerome H. Powell has previously indicated, however, that the central bank can only do so much and that more action from the White House and Congress is needed in connection with the extraordinary economic casualties of the health crisis.
Although there were an additional 2.5 million jobs in May, payroll employment has fallen 19.6 million since February, and millions of people have left the workforce.
The Fed is projecting an average unemployment rate of 9.3% in the fourth quarter, down to 6.5% in the last months of 2021, according to the median estimates from Fed officials. The range of projections is very broad, with some estimating unemployment as low as 4.5% and some estimating as high as 12% in the fourth quarter of 2021.
Unemployment was at a 50-year low of 3.5% in February before the COVID-19 outbreak in the US.
Congress has approved about $ 3 trillion in various pandemic relief measures.
In pushing for more fiscal support, Powell has been careful not to be drawn into a very partisan vortex around the pandemic and Washington’s response to it, especially from Trump’s and anti-Trump camps.
And at a press conference Wednesday afternoon, Powell is likely to do a political tap dance around polarized conditions, because he has more than 2½ years of his tenure as chairman of the US central bank.
Trump recently praised Powell for responding quickly and aggressively to the collapse of economic activity, but for most of the previous two years, Trump and his supporters carried out a sharp attack on Powell, saying a rate hike at the end of 2018 was inappropriate and the Fed had not done enough to sustain the economy.
“This is a difficult time to issue estimates. … This could be a real flash point, “said Diane Swonk, chief economist at the accounting firm Grant Thornton and a longtime observer of the Fed.
Swonk said Powell had gone further than other Fed leaders and was “out of his comfort zone” in advocating for fiscal aid. But he added: “We are already in fiscal exhaustion, and the Fed is fighting it.”
