“The recovery has progressed more quickly than generally expected,” Fed Chair Jerome H. Powell said at a news conference. “Even so, overall activity remains well below its level before the pandemic, and the path ahead remains highly uncertain.”
At the same time, the majority of Fed officials expected the benchmark interest rate would stay at or near zero through 2023. The Fed also said it would increase holdings of Treasury securities and agency mortgage-backed securities at the current pace, which officials say is helping stave off an even deeper financial crisis.
By August, the unemployment rate had already fallen to 8.4 percent, lifting hopes that the economy was finding its footing. The last time Fed policymakers released their projections in June, they expected the unemployment rate to fall to 9.3 percent by the end of the year, 6.5 percent by the end of 2021 and 5.5 percent by the end of 2022.
Policymakers’ estimates for how far GDP would fall this year also improved. Officials now predict a decline of 3.7 percent by the end of the year, compared to June expectations of a 6.5 percent drop.
The projections, which are completed anonymously by Fed policymakers, offer a snapshot into how Fed leaders think unemployment will trend in the years to come. But there is plenty the estimates do not account for.
For example, economists and policymakers fear that the upcoming flu season, paired with a potential rise in coronavirus cases, could weigh on the broader recovery. Congress is also stalled on another massive stimulus bill, so the projections don’t factor in what the economic benefits of a rescue package might be, or how the absence of more aid could weigh on struggling households and businesses.
At the news conference, Powell said his “sense is that more fiscal support is likely to be needed.” Powell said Congressional relief through the Cares Act, including the now-expired $600 enhanced unemployment benefits, “has been essential” and warned of the hazards of cutting off all aid prematurely, especially to the most vulnerable Americans who held jobs in gutted industries, and to state and local governments facing budgetary crises.
“If there’s no additional support … that’s going to show up in economic activity, and in things like evictions and foreclosures and things that will scar and damage the economy,” Powell said. “That’s a downside risk. I think the questions [around another stimulus bill] of when and how much and what will be the content — and no one has any certainty around that. If we don’t get that, there would certainly be downside risks.”
The Fed, for its part, can only lend to struggling businesses and local governments. Powell noted that for many businesses in need of relief, “getting a loan that may be difficult to repay may not be the answer” and that “in these cases, direct fiscal support may be needed.”
Fed policymakers expect rates to remain at zero “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time,” according to a statement released by Fed policymakers before the news conference.
That’s due to the scale of the current crisis and the Fed’s new policy framework, which signals that the central bank won’t increase interest rates to respond to low levels of unemployment, and that leaders won’t worry as much about low rates triggering a rise in prices. Still, the Fed has offered little concrete information on how the new framework will be put into practice.
The framework also allows for a temporary overshoot of the Fed’s 2 percent inflation target to balance out periods when inflation skirted below. Based on the latest projections, officials did not see inflation topping 2 percent by the end of 2023, raising further questions about how the Fed expects to put the new strategy to the test.
The economy added 1.4 million jobs in August, an encouraging sign after Powell warned that a summer surge in coronavirus cases was starting to slow the pace of the recovery. The auto and residential real estate sector have also posted strong sales. Retail sales figures released Wednesday showed positive signs for consumer spending.
But there’s a long way to go. Just over half of the 22 million total jobs lost between February and April have not returned. Many of the Fed’s interventions lift the stock market but do little for Americans who don’t hold investments. And as more time passes, many businesses teetering on the brink risk permanent closure.
“The overall picture is that the labor market is recovering, but it is a long way, a long way, from maximum employment,” Powell said. “That’s the bottom line on it.”