At the June meeting of the Federal Open Market Committee, Chairman Jerome Powell said the Fed will continue to use its emergency powers as required, and more stimulus could be necessary to combat the coronavirus pandemic’s impact.
The Federal Open Market Committee, the Fed’s rate-setting body, said in a statement, “The ongoing public health crisis will weigh heavily on economic activity, employment and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. The committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
The Fed also expects to continue to increase its holdings of Treasury and mortgage-backed bonds in the coming months, at least at its current pace of purchases, to continue to support the functioning of credit markets to provide credit to people and businesses.
Fed tamps down economic projections
The FOMC members also provided their individual projections about their expectations for economic outcomes.
- Members, at the median, expect economic output to decline 6.5% for 2020, and rise 5% for 2021.
- They expect the Fed funds rate, at the median, to be at 0.1%, practically 0%, through 2022, and rising to 2.5% in the longer run.
- Their median expectation for the unemployment rate is 9.3% for 2020, declining to 6.5% for 2021 and 5.5% for 2022.
- Their median inflation outlook is at 0.8% for 2020, rising to 1.6% for 2021 and 1.7% for 2022.
In his email commentary about the Fed rate decision, Ian Shepherdson, chief economist, Pantheon Macroeconomics, noted, “FOMC members all make their own assumptions; they clearly vary widely, so some of them will be very wrong. But the median forecasts seem reasonable to us, if the median underpinning assumption is that a vaccine is widely available before the middle of next year. If not, all bets on the speed of the recovery are off.”
In a related press conference, Fed Chairman Jerome Powell noted that the FOMC didn’t change its longer-run estimate for growth, and he is hopeful he will not have to change his own estimates. Powell said, “This is the biggest economic shock in the U.S. and the world in living memory,” with the U.S. economy going from its lowest unemployment rate to its highest in a matter of months.
But it seems consumers were more optimistic in their outlooks for the labor market and their household finances in May, compared to their bleaker outlooks in April.
The Federal Reserve Bank of New York’s May survey of consumer expectations found that consumers expect, at the median, a 2% earnings growth in the year ahead, up from April’s 1.8%. Lower-income respondents and those without a college degree tended to be more optimistic about this measure.
Consumers more optimistic on labor market
More people on average were optimistic that the unemployment rate will not be higher in the next year. Only 38.9% expected that this statistic will be higher a year ahead, compared to the 47.6% who believed so in April, and 50.9% who expected this in March. People across all ages, incomes and education levels were more positive.
Consumers were also more optimistic about holding on to their jobs, with the average anticipated probability of losing one’s job in the next year falling to 18.7%, from April’s 20.9%. It is still above the 12-month trailing average of 15.2%. Respondents were also more optimistic about their prospects for landing a new job if they lost their current ones.
Respondents anticipated, at the median, that inflation a year ahead, would rise to 3% (up 0.4% from April). Their median inflation expectations for three years ahead remain unchanged at 2.6%, though.
However, there was a lot of disagreement among the respondents about the outlook for inflation. Inflation expectations for food and gas prices a year ahead both touched a series high in May, reaching 8.7% and 7.8%, respectively.
People were inclined to be more pessimistic about their perceptions of access to credit, with 49.6% reporting that credit was harder to access than a year ago, up from 48% for April. Fewer of the respondents also expect that they will find it easier to access credit in the year ahead.
More stimulus may be required
Powell noted that the Fed will continue to use its special emergency tools forcefully to provide support to the economy, and it might need to do more.
However, the Fed has more lending powers than spending powers and expects the loans it makes to be repaid. Thus, “direct fiscal support,” or action from Congress through more stimulus – which can make a critical difference in preventing long-lasting damage to the economy – may be needed and it is up to elected officials to decide on that.
The May employment report is promising, with the economy adding 2.5 million jobs for the month, contrary to economists’ expectations for job losses. But Powell expects that the road to labor market recovery will be long, with more than 20 million people having been displaced. And it could take years for these people to get back to work.
Powell also noted that the Fed will not hold back on its support just because stock prices have gone up.