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Fed Pledges to Use ‘Full Range of Tools’ to Combat Virus Disruptions Fed Suggests Tough Road Ahead as It Pledges to Help Insulate Economy
(about 3 hours later)
The Federal Reserve pledged on Wednesday to use its “full range of tools” to insulate the economy as coronavirus lockdowns sap economic growth and throw millions out of work, saying it would keep interest rates near zero until a recovery was well underway. Jerome H. Powell, the Federal Reserve chair, struck a worried tone at his first regularly scheduled news conference since the coronavirus shuttered the United States economy, calling the job losses taking hold “heartbreaking” and predicting a long road ahead.
Fed Chair Jerome H. Powell, speaking at a news conference immediately after the central bank’s two-day policy meeting, said the economy is suffering from the “forceful” steps the country has taken to slow the spread of the virus and said it remains unclear how long the economic stress will continue. Mr. Powell, who had been presiding over the longest economic expansion on record, has watched as the strongest labor market in generations slipped away. More than 26 million workers have lost jobs as quarantines and lockdowns close businesses, sapping the fuel from a consumer-driven economy.
“The depth and the duration of the economic downturn are unknown,” Mr. Powell said, adding that “the burdens are falling most heavily on those least able to carry them.” While much of that pain could prove temporary, the world’s most important economic leader sounded an alarm that the recovery could be slow and halting — and that the damage virus containment efforts have inflicted on the economy could be especially painful for the most vulnerable.
“Millions of workers are losing their jobs,” he said and “household spending has plummeted.” “We were hearing from low- and moderate-income and minority communities that this was the best labor market they’d seen in their lifetime,” he said. “It is heartbreaking, frankly, to see that all threatened now. All the more need for our urgent response, and also that of Congress.”
The Fed, which slashed rates to near zero at two emergency meetings last month, left rates unchanged and suggested officials would not be raising rates anytime soon. Mr. Powell reiterated the central bank’s statement that it is “committed to using its full range of tools to support the U.S. economy in this challenging time.” Mr. Powell promised that the Fed would push its powers to their limit to help the economy, keeping rates low and funneling credit into crucial markets. But he also made it clear that elected policymakers must do their part to keep households and businesses from falling too far behind, and underlined repeatedly that the stakes were high, particularly for the job market.
“The path of it is highly uncertain, but we will be there with our tools, supporting the economy and supporting that recovery,” he said. “Longer and deeper downturns have left more of a mark, generally,” Mr. Powell said. “That’s why the urgency in doing what we can to prevent that longer-run damage. It doesn’t have to be that way.”
But Mr. Powell acknowledged that low interest rates cannot solve an economic slowdown caused by a virus that has quarantined workers, sidelined millions of workers and shuttered business activity across the country. Mr. Powell’s Fed has staged a whatever-it-takes response to the coronavirus crisis, slashing interest rates to near zero, rolling out a gigantic bond-buying program to soothe troubled markets and setting up a series of emergency lending programs to keep credit flowing to businesses and households.
“Lowering interest rates cannot stop the sharp drop in economic activity,” Mr. Powell said, as people are ordered to stay home and businesses remain closed. Officials on Wednesday pledged to keep rates near rock bottom for the foreseeable future and to use their “full range of tools” to help the economy to climb back. But Mr. Powell stressed that the central bank could not perfectly counter the crisis at hand.
While the Fed is using all its available tools, he said, the central bank can only lend money to keep credit flowing, not spend it in the way that fiscal policymakers are able. “Lowering interest rates cannot stop the sharp drop in economic activity caused by closures and other forms of social distancing,” Mr. Powell said. He later added that the Fed “can continue to be part of the answer,” but “it may well be the case that the economy will need more support from all of us.”
“Elected officials have the power to tax and spend,” he said, suggesting that more direct support to those hardest hit by the crisis might be needed to help restart the economy. He highlighted the need for fiscal policies that protect businesses and households from “avoidable insolvency.”
Officials gathered virtually for their first regularly scheduled meeting since the crisis took hold in the United States. In addition to cutting rates, the Fed has been buying large quantities of government and mortgage-backed debt to keep critical markets functioning. The Fed’s announcement came just hours after a government report showed that the economy contracted at a 4.8 percent annualized rate in the first quarter. While that was the worst reading since 2008 and ended the record-long expansion, it probably barely scraped the surface of the coronavirus damage. Lockdowns started only toward the end of the quarter.
Officials have also unveiled a spate of emergency programs that either buy debt or lend money into critical sectors. Congress handed the Treasury Department $454 billion to support the Fed’s programs, which need to be protected against credit losses. Officials have used that backing to push the Fed’s emergency lending powers further than they went even in the depths of the 2008 financial crisis: They plan to buy municipal debt and to help both large and midsize companies gain access to credit. The contraction is expected to look even worse in the three months through June, but what will happen after that remains extremely uncertain. States and cities are tiptoeing toward a reopening, but that process could take months. It is also unclear when consumers will feel comfortable enough to return to shopping malls and concerts, let alone travel for work or pleasure.
The efforts come as quarantines and stay-at-home orders hurt economic growth. The economy contracted at a 4.8 percent annualized rate in the first quarter, the worst reading since 2008, as spending on services plummeted. That ended the longest United States economic expansion on record, but it probably only scraped the surface of the coronavirus damage, since lockdowns started toward the end of the quarter. Analysts expect the economy to shrink by 25 percent in the three months through June, based on the median in a Bloomberg survey. Fed officials warned that the economy may be in for an unsteady journey back to growth and prosperity. Mr. Powell said second-quarter economic data would be “worse” than anything previously seen, that it might take consumers time to feel comfortable spending again, and that companies and workers might need additional financial help.
The Fed, in its statement, suggested a long road ahead before recovery, saying that “the ongoing public health crisis will weigh heavily on economic activity, employment and inflation in the near term” as well as “considerable risks to the economic outlook over the medium term.” In their post-meeting release, Fed officials flagged “considerable risks to the economic outlook” over the medium term, suggesting central bank officials did not anticipate growth to bounce back quickly in the “V-shaped” recovery that President Trump and some other administration officials still seemed to expect.
“They are giving some insight into how they see the trajectory for the economy, which is not a V-shaped path,” said Michelle Meyer, head of U.S. economics at Bank of America, specifically pointing to the medium-term warning on growth. “They’ll keep interest rates low for a long time, they’ll err on the side of being more accommodative, rather than less.” “They are giving some insight into how they see the trajectory for the economy, which is not a V-shaped path,” said Michelle Meyer, head of U.S. economics at Bank of America. “They’ll keep interest rates low for a long time, they’ll err on the side of being more accommodative, rather than less.”
Mr. Powell outlined a somewhat bleak path ahead, saying that second-quarter economic data would be “worse” than anything previously seen and that it was hard to predict when a recovery might begin given uncertainties surrounding the virus. The central bank has some room to maneuver even with rates at rock bottom.
“Economic forecasts are always uncertain — today they’re unusually uncertain,” he said. Congress has handed the Treasury Department $454 billion to back up Fed emergency lending programs, which can help businesses, states and cities gain access to credit. Less than half of that funding has been earmarked, and not all of the programs the Fed has announced are up and running yet.
Even once people begin going back to work and economic activity resumes, Mr. Powell suggested a slow recovery ahead given concerns about contracting the virus. Mr. Powell suggested on Wednesday that the Fed’s two corporate bond programs would begin buying debt soon, and that the Fed would lay out revised plans for its midsize business program, which is supposed to help companies that are too big for forgivable small business loans but too small to readily access capital markets.
“People will come out of their homes, start to spend again,” he said, but “when will that be? It’s very hard to say.” He added that even once that happened, “it’s unlikely that it would bring us” quickly back to pre-crisis levels” as people remained concerned about venturing out. But the central bank cannot make grants, and even its lending powers are constrained to fairly healthy borrowers.
Treasury Secretary Steven Mnuchin, who must sign off on the programs, has indicated that he is not willing to take risks that lead to major losses.
“I think it’s pretty clear if Congress wanted me to lose all of the money, that money would have been designed as subsidies and grants as opposed to credit support,” Mr. Mnuchin told reporters on Wednesday.
Mr. Powell indicated that he would defer to Mr. Mnuchin on matters of credit risk, but also said the Fed was ready to use whatever it had at its disposal, even if those abilities were somewhat limited.
“The path of it is highly uncertain, but we will be there with our tools, supporting the economy and supporting that recovery,” Mr. Powell said. “We can do what we can do, and we will do it to the absolute limit of our powers.”
Alan Rappeport contributed reporting.