Federal Reserve Chairman Jerome Powell warned on Wednesday that growing cases of coronavirus in the US are already showing signs of thwarting the economic recovery.
On Wednesday, the Fed kept interest rates close to zero as the central bank continues efforts to support an economic recovery. But Powell said the high-frequency data pointed to an economy that appears to have slowed since COVID-19 cases began to rise again in mid-June.
There have been more than 4 million reported cases of COVID-19 in the United States, and Johns Hopkins University reported Wednesday that the death toll from the virus exceeded 150,000. By keeping rates stable, the statement from the Federal Open Market Committee included a new sentence stating that “the path of the economy will depend significantly on the course of the virus.”
At his press conference, Powell said the Fed “cannot say it enough.”
Powell told reporters that “taken together, the data appears to point to a slowdown in the pace of recovery.” But I want to emphasize: it is too early to say how big it is and how sustained it will be. “
The head of the Federal Reserve noted that spending on credit and debit cards, hotel occupancy rates, and visits to restaurants and bars appear to have decreased as cases of the virus increased. Powell added that consumer surveys appear to be “softening again,” while labor market indicators pointed to a slowdown in job growth, particularly among small businesses.
However, not all parts of the economy seemed weak, with Powell targeting home and motor vehicle sales as areas of strength. In the opening remarks, Powell pointed to optimism about household spending recovering about half of its decline, and the job market recovering about a third of lost jobs.
But with the economy still well below pre-pandemic health, the Fed chairman suggested that the economic recovery now faces a tipping point that will largely depend on halting the spread of the virus.
“Therefore, we have entered a new phase to contain the virus, which is essential to protect our health and our economy,” said Powell.
He added that social distancing and the rapid reopening of the economy go hand in hand, and tells Americans that “we all have a role to play.”
New York City, Chicago, Florida, and Southern California were the main critical points. (Graphic: David Foster / Yahoo Finance)
New York City, Chicago, Florida, and Southern California were the main critical points. (Graphic: David Foster / Yahoo Finance)
The Fed has already lowered interest rates to near zero and restarted its asset purchase policy in the crisis era through quantitative easing. The central bank has also relied heavily on its powers of lender of last resort by establishing 11 liquidity mechanisms designed to support financial markets, ranging from corporate debt to municipal bonds.
Powell said the Federal Reserve still has tools that it can implement, if necessary. For example, policymakers have been discussing the use of explicit direct guidance, in which the Fed would commit to keeping rates at the zero limit until unemployment and / or inflation reach certain targets.
The central bank has ruled out tools like negative interest rates, and today reduced the possibility of the Fed buying stocks.
Even forward-looking, the Fed appears to have little urgency to unveil that tool soon. Powell said the committee plans to deliberate on using the forward orientation at “future meetings.”
In response to a question from Yahoo Finance, Powell said the Fed wants to work on another project first: completing its review of the monetary framework. Before the COVID-19 crisis, the Fed was in the process of auditing its monetary policy tools to see if it could modify elements such as the approach it uses to target inflation.
Powell hinted that completing that review, to be done in the “near future,” would help establish strategies to address the current crisis.
“It is important to go back and finish that and that will inform everything that we are doing in the future,” Powell said.
JPMorgan’s Michael Feroli wrote on Wednesday that the July meeting was largely a “placeholder event” for September, where Feroli expects the framework review to be completed.
The next FOMC meeting will take place on September 15 and 16.
