Contrary to the expectations of many in Wall Street (and President Trump), the US economy won’t be taking off into recovery any time soon, according to the US Federal Reserve’s latest post monetary policy meeting statement and quarterly forecasts.
The Fed’s Open Market Committee will keep interest rates close to zero through 2022, as the US central bank made it clear it remains “committed” to bolstering an economy hit by the coronavirus pandemic.
Fed chair, Jay Powell also repeatedly told media after the statement’s release the Fed would do all it can to help steady the economy but made it clear he wants Congress and the Trump administration to provide more help.
He said the Fed would do “whatever we can and for as long as it takes” to support the recovery and “limit lasting damage” to the economy.
The Fed also released updated economic forecasts – the first since the pandemic swept across the globe expects the US economy to contract by 6.5% this year, with unemployment only falling to 9.3% by year’s end.
The Fed dropped its quarterly forecasts in March as the pandemic shutdown the US and making it impossible to look into the future with any confidence.
The Fed expects the recovery to begin in earnest in 2021, with growth forecast at 5%.
Further, the Fed projections show the unemployment rate falling to 6.5% at the end of 2021 and 5.5% at the end of 2022 – a full 2 percentage points above where it was at the end of 2019. That means millions of extra unemployed for years.
The Fed also promised to maintain bond purchases at least at the current pace of around $US80 billion a month in Treasuries and $US40 billion per month in agency and mortgage-backed securities – a sign the Fed sees its support lasting longer than many on Wall Street believe (but secretly hoped for).
Last Friday’s 2.5 million new jobs report and fall in the jobless rate had led growing belief for a faster recovery. That saw share prices continue their recent surge with Nasdaq hitting new record highs this week.
At the same time, US inflation is not a problem and won’t be for a while as consumer price inflation fell for the third month in a row.
The US Labor Department the CPI dipped 0.1% last month after plunging 0.8% in April, which was the largest decline since the end of 2008. That was after a 3.5% drop in the cost of petrol, which followed a 20.6% plunge in April.
That offset a 0.7% increase in the cost of food last month. Food prices jumped 1.5% in April, driven higher by a near 11% rise in the cost of beef thanks t shortages caused by COVID-19 closing processing works.
