Fed faces viral wave, mounting risks to recovery
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[July 29, 2020]
By Howard Schneider
(Reuters) - In a fast-changing global
pandemic, this was not the turn U.S. Federal Reserve officials hoped for
in early June, when their forecasts showed guarded optimism for a
sharpish early economic rebound and steady slow growth to follow.
In the ensuing seven weeks, much has gone downhill.
The coronavirus pandemic has intensified and prompted new economic
restrictions. Data has pointed to a possible slowdown in business and
hiring. And so-far stalled talks in Washington about further government
relief have pushed the country to the brink of a spending cliff.
The risks to the U.S. recovery, in short, have grown substantially, and
the new Fed policy statement to be released Wednesday afternoon will
show just how seriously U.S. central bankers assess them. On Tuesday the
Fed already made one nod to the outlook, extending from Sept. 30 to Dec.
31 the availability of the emergency credit programs it set up early in
the pandemic when hopes of a quick "V" shaped recovery were still
strong.
Fed officials "always feared a rushed reopening would lead to a virus
resurgence that would cap the recovery," said Krishna Guha, vice
chairman of Evercore ISI. Now that the disease has raced back over the
summer, the Fed "is grappling with whether this is a short-term or
longer-range setback and what the implications are for its policy."
The policy statement will be released at 2 pm EDT (1800 GMT) and Fed
chair Jerome Powell is scheduled to hold a press conference a half hour
later. No new economic projections will be issued at this meeting.
Nor is the Fed expected to announce any major policy decisions on
Wednesday. Officials may point to a pending shift this fall in how it
views its inflation target, or begin setting explicit goals for the
jobless rate or inflation to be met before it considers raising interest
rates from the current near-zero level.
That goal-based guidance seemed to be favored by policymakers according
to minutes of the June Fed meeting, and several Fed analysts have said
they expect it to be announced at the September Federal Open Market
Committee session.
But with a dozen new programs rolled out since March to fight the
economic fallout from the pandemic, the Fed is now watching to see how
the economy and events evolve.
Those measures were meant largely as emergency support for an economy
that likely registered a historic nosedive in the April through June
quarter. First estimates of growth in gross domestic product for that
period will be issued Thursday, and the median estimate of economists
polled by Reuters is for an annualized decline of 34%.
In addition recent data suggest the hoped-for rebound, which started
with an unexpected round of hiring in May and June, may have plateaued -
a motivation for the Fed's extending its emergency programs at least
through the end of the year.
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Federal Reserve Chairman Jerome Powell, wearing a face mask,
testifies before the House of Representatives Financial Services
Committee during a hearing on oversight of the Treasury Department
and Federal Reserve response to the outbreak of the coronavirus
disease (COVID-19), on Capitol Hill in Washington, U.S., June 30,
2020. Tasos Katopodis/Pool via REUTERS
The official jobless rate fell from 14.7% in April to 11.1% in June,
for example, but a survey by the Dallas Federal Reserve since then,
as well as a new employment forecast by the St. Louis Federal
Reserve, both suggest employment dipped this month. Last week new
claims for unemployment insurance rose for the first time since
March.
"The spike in virus cases is indeed sucking the oxygen out of the
robust economic recovery" that seemed to be taking shape in May and
June, wrote Bank of the West chief economist Scott Anderson in a
July 24 analysis.
Also of concern, several of the key measures approved at the start
of the pandemic to try to bolster families and businesses are coming
to an end, perhaps most notably the $600 a week addition to
unemployment insurance benefits. Members of Congress are debating a
possible extension, but the benefit expires this week - a sign in
general that the pandemic is on a different timetable than that
envisioned by elected leaders when they approved the initial
pandemic relief package.
The unemployment benefits are currently being received by around 30
million people, pumping $18 billion of disposable income into the
economy each week. Along with the $520 billion loaned to small
businesses under the Paycheck Protection Program, many firms and
families were able to sustain spending, make rent and mortgage
payments, and hold off what would have been a far worse economic
shock
As the Fed meets the outcome of congressional negotiations over
further relief remains uncertain - another risk, this one under
human control - to the economic landscape.
"If these programs aren’t extended, layoffs could rise and job
growth could weaken further. While the recession was abrupt, the
labor market recovery is expected to be a long, uneven slog,"
Anderson said.
Consumers may already be poised to buckle. The Conference Board's
index of consumer expectations dropped sharply in July. Major states
like Florida, Texas and California saw large declines, which were
"no doubt a result of the resurgence of COVID-19," survey director
Lynn Franco said on Tuesday.
"Looking ahead, consumers have grown less optimistic about the
short-term outlook for the economy and labor market and remain
subdued about their financial prospects. Such uncertainty about the
short-term future does not bode well for the recovery, nor for
consumer spending,” she said.
(Reporting by Howard Schneider; Editing by Dan Burns and Andrea
Ricci)
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