Federal Reserve leaves rates near zero as recovery sputters
By Jeanna Smialek
The Federal Reserve left interest rates near zero on Wednesday and Jerome Powell, the Fed chair, predicted a long road ahead as a recent spike in virus cases saps momentum from the nascent economic recovery.
“The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in keeping the virus in check,” Powell said at a news conference following the Fed’s two-day meeting, noting that infections have surged since late June and the “pace of recovery looks like it has slowed.”
Powell said policymakers needed more data before drawing firm conclusions about the scope of the pullback, but he noted that debit and credit card spending were slowing and labor market indicators suggested that recent job gains might be weakening. More than 14 million people who held jobs in February are no longer employed, Powell said, warning that it will take a while for workers in certain industries, like restaurants, hotels and travel, to find new jobs.
“There’s probably going to be a long tail where a large number of people are struggling to get back to work,” he said, adding that the Fed was “not even thinking about thinking about thinking about” raising rates.
The labor market rebound “is going to take a while,” he said, and “we’re going to be there for all of that.”
While the Fed took no major actions on Wednesday, Powell’s comments underlined both the peril ahead for American workers and the reality that interest rates are likely to be very low — making money cheap to borrow — for an extended period of time. Stock prices climbed following his remarks as investors took heart in the Fed’s patient stance.
Ahead of Powell’s comments, the central bank reiterated in its post-meeting statement that the Fed would keep low rates in place “until it is confident that the economy has weathered recent events.”
The Fed’s announcement came as another round of tense negotiations continued in Congress over providing more support to workers and businesses still struggling amid the pandemic, including whether to extend an extra $600 per week in unemployment benefits that is set to expire this week.
Powell said the support lawmakers had already provided had been critical for workers and businesses and, in turn, the economy. While he did not weigh in on how high unemployment insurance benefits should be set, he said it would be important to help the large number of workers who were likely to be displaced even if the economy reopened successfully.
“There won’t be enough jobs for them — those people will need support,” he said, noting that government policy so far has “kept people in their homes, it’s kept businesses in business.”
The Fed said on Wednesday that it would also extend its programs meant to keep dollar funding readily available to foreign central banks through March.
Powell said it was important that the facilities stay in place “until we’re very confident that the turmoil from the pandemic and the economic fallout are behind us.”
That could take time. The unemployment rate, while falling, remains historically high at 11.1%. Initial jobless claims ticked up last week after months of gradual improvement, stoking concerns that the economy might be backsliding. Data suggest that many businesses are beginning to close permanently.
The job losses are hitting disadvantaged communities particularly hard. The Fed’s own surveys have shown that poorer people were more likely to lose jobs, and those with less education often did not have the option to work from home. The jobless rate for Black workers has skyrocketed to more than 15%, and the unemployment rate for Black men continued to tick up in June even as the rate for other racial and gender groups began to fall.
Powell acknowledged the unequal brunt of the pandemic on Wednesday, and said that what the Fed can do is focus on fostering a strong labor market.
“What we’re trying to do is create an environment, in the financial markets and in the economy, where those people have the best chance they can have to go back to work to their old job or to a new job,” Powell said.
While Fed officials’ June economic projections suggested that they expected unemployment to fall below 10% by the end of the year, based on the central forecast, policymakers made it clear that conditions were extremely uncertain. The recent surge in infections could temper the more optimistic takes.
The central bank’s policies do seem to be offering support, at least around the edges. House buying has ticked up, fueled by cheap mortgage rates, and the U.S. homeownership rate is now at levels last seen before the 2008 financial crisis.
Key credit markets have calmed down after a disorderly March and April, as has the market for U.S. government debt.
While investors expect the Fed to eventually make a more concrete commitment to maintaining low rates for months or years — by pegging them to the unemployment or inflation rate, or by pledging to keep rates low until a calendar date — Powell said on Wednesday that conversations about such approaches would continue at future meetings.
He also said the Federal Open Market Committee’s longer-run framework review, which could guide the central bank’s strategies, would be completed in the near future. Some economists took that news to mean that more action is coming at the Fed’s Sept. 15-16 meeting.
“The July FOMC meeting was expected to be a placeholder event until more important decisions are made at the next meeting in September,” Michael Feroli, the chief U.S. economist at J.P. Morgan, said in a note. “The committee met those expectations.”