WASHINGTON, D.C. — The Federal Reserve signaled Wednesday that it was likely to hold interest rates near zero through 2022 —an indication that central bank policymakers see a long road to recovery from the economic devastation wrought by the coronavirus pandemic.
The Fed sounded an encouraging note about improved financial conditions and predicted that the economy would make up considerable lost ground next year. But officials by and large do not expect the nation to get back to full employment until after 2022.
The Fed’s unemployment projections were nonetheless more positive than recent forecasts from the Congressional Budget Office and many private analysts, probably reflecting Friday’s surprising employment report for May. That showed large job gains and a drop in the unemployment rate, to 13.3% from 14.7% in April.
President Trump held up the good jobs news as evidence that the economy would soon be roaring back, and some on Capitol Hill questioned whether additional pandemic relief aid was warranted.
The Fed outlook “could take some steam out of those arguing for a V-shaped recovery,” said Christopher Rupkey, chief financial economist at MUFG Bank, referring to a relatively quick and complete bounce-back from the downturn.
The Fed has gone to great lengths to stabilize financial markets, and its statement Wednesday reaffirmed its pledge to maintain rock-bottom interest rates, keep making large-scale bond purchases and operate various lending programs for as long as needed.
Fed Chair Jerome H. Powell has previously indicated, however, that the central bank can only do so much and that more action from the White House and Congress is needed in light of the extraordinary economic toll from the health crisis.
Despite the addition of 2.5 million job gains in May, payroll employment is down 19.6 million since February, and millions more people have dropped out of the labor force.
The Fed projected the jobless rate to average 9.3% in the fourth quarter, declining to 6.5% in the final months of 2021, according to the median forecast from Fed officials. The range of projections was very wide, with some forecasting unemployment as low as 4.5% and some predicting as high as 12% in the fourth quarter of 2021.
Unemployment was at a 50-year low of 3.5% in February before the COVID-19 outbreak in the U.S.
Congress already has approved around $3 trillion in various pandemic relief measures.
In pushing for more fiscal support, Powell has been careful not to be drawn into the highly partisan maelstrom surrounding the pandemic and Washington’s response to it, particularly from the Trump and anti-Trump camps.
And at a news conference Wednesday afternoon, Powell is likely to do a political tap dance around the polarized conditions, as he has over much of his 2{-year tenure as chair of the U.S. central bank.
Recently Trump has complimented Powell for responding swiftly and aggressively to the collapse in economic activity, but for most of the prior two years, Trump and his supporters levied sharp attacks at Powell, saying a rate hike in late 2018 was ill-advised and the Fed hadn’t done enough to prop up the economy.
“It’s a difficult time to be putting out a forecast. … This could be a real flashpoint,” said Diane Swonk, chief economist at Grant Thornton accounting firm and a longtime Fed watcher.
Swonk said Powell had gone further than other Fed leaders and “way out of his comfort zone” in advocating for fiscal relief. But she added: “We’re already in fiscal fatigue, and the Fed’s been combating that.”
