KEY POINTS

  • The Fed predicts unemployment to be 9.3% by the end of the year and not falling to 5.5% until 2022
  • The FOMC plans to keep the federal funds rate between zero and 1/4% for the foreseeable future
  • Powell warns a second wave of the pandemic will hurt the recovery

The U.S. Federal Reserve on Thursday painted a grim economic picture through the end of the year and pledged to continue emergency measures to use “its full range of tools” to support the economy and promote maximum employment and price stability.

Following its regular two-day meeting, the Federal Open Markets Committee said it would keep the key federal funds rate at zero to 1/4% and continue its bond-buying program for the foreseeable future.

“The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals,” the FOMC said in its post-meeting statement.

The Fed predicted the gross domestic product would fall 6.5% this year while the unemployment rate would remain elevated at 9.3%, not falling to 5.5% until the end of 2022, with inflation at 0.8%, far below the target of 2%. Fed Chairman Jerome Powell noted inflation never got to 2% during the 128-month expansion – the longest in U.S. history – that ended in February as the coronavirus pandemic began exerting its influence.

Powell said a second wave of the pandemic likely would hurt the recovery, discouraging people from travel and other activity.

The Fed projections are not nearly as rosy as President Trump has been painting. Friday’s surprise drop in May unemployment prompted Trump to again predict a V-shaped recovery.

Powell called on Congress to approve more stimulus for the economy, noting the Fed has lending, not spending, power. Powell also acknowledged what he called the “tragic events” of recent days, saying there is no place for racial inequality in Fed policy or the U.S. society as a whole.

Powell called May’s unemployment rate drop the “biggest data surprise anyone can remember,” pointing out how difficult it is to predict the path the economy will take.

“The labor market may have hit bottom … but we’re not going to overreact to a single data point,” he said.

“Given the unusually high level of uncertainty … we can’t identify a single [economic] path as the most likely one.”

In response to a question, Powell said drawing comparisons to the Great Depression is inappropriate.

“The Great Depression is not a good example of what is happening here,” he said citing the “fast” and “forceful” government response and the strong position of the financial sector before the economy was forced to shut down.

Powell said there is a general expectation for recovery beginning in the second half of the year and continuing over the next two years by keeping interest rates near zero. But he said with more than 20 million workers displaced by the economic shutdown, it will take time to recover.

Powell declined to say whether the extra $600 a week in unemployment benefits set to expire at the end of July should be extended.

“This is the biggest economic shop in the U.S. and world in living memory. We went from lowest level of employment to the highest in two months,” he said, adding that consideration needs to be given to how the government can help those who will not be able to return to their jobs immediately.

“So far, it’s a good response and having a big effect. The question is: Is it big enuf?

Powell said the lending facilities the Fed developed to deal with the crisis are unique and will be adjusted as they are evaluated.

“There’s no playbook for this,” he said.

Anthony Denier, CEO of trading platform Webull, it's not surprising the Fed decided against tampering with interest rates given its level of pessimism.

"The Fed made statements about continuing to support the markets by continuing bond purchases, which is a big deal as they had previously insinuated that they might taper bond purchases. However, it appears that they are being more accommodative to keep rates low," he said.

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