Fed holds interest rates near zero, vows forceful action amid coronavirus's economic fallout

The Federal Reserve on Wednesday held its key interest rate near zero and vowed to continue taking aggressive action to combat the effects of a coronavirus pandemic that has set off an unprecedented economic downturn.

“The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals,” the Fed said at the outset of a statement after a two-day meeting.

Although the central bank has emptied much of its arsenal to prop up a reeling economy, Fed Chair Jerome Powell said at a virtual news conference, "We can continue to be part of the answer. Will there me a need to do more? I would say yes...Our credit facilities are wide open."

Congress has set aside $454 billion for the Treasury that the Fed can use for additional lending programs. The Fed has used less than half of that money, which can be leveraged to a far greater amount in loans.

The Fed reiterated its pledge to keep rates at a range of zero to 0.25% “until it is confident that the economy has weathered recent events and is on track to achieve its” employment and inflation goals. Fed policymakers also said they'll continue to buy Treasury and mortgage bonds "in the amounts needed" to support ailing financial markets.

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Powell would not say specify how long the Fed will keep rates near zero but said, "We're going to wait until the economy is well on the road to recovery" before nudging rates higher. "We're going to be very patient."

Goldman Sachs doesn’t expect the Fed to raise interest rates again until late 2023.

The Fed downgraded its economic outlook in stark terms.

“The coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world,” the Fed said. “The virus and the measures taken to protect public health are inducing sharp declines in economic activity and a surgeon job losses.”

"It's such an extraordinary shock, unlike anything that's happened in my lifetime," Powell said. "It's clear the effects on the economy are severe."

Weak demand and lower oil prices also have put further downward pressure on inflation, the Fed added.

The Fed’s first scheduled meeting since January comes just hours after the Commerce Department reported that the U.S. economy contracted at an annual rate of 4.8% in the first quarter. It marks the first decline since 2014 and the steepest since late 2008 during the depths of the Great Recession and financial crisis.

But the brutal showing will likely be dwarfed by a projected 30% to 40% output drop in the current quarter, the largest in modern history, before an anticipated recovery begins in the second half of the year.

In March, the Fed lowered its benchmark federal funds rate by 1.5 percentage points to near zero and renewed its crisis-era purchases of Treasury bonds and mortgage-backed securities. The Fed so far has bought about $2 trillion in bonds to revive financial markets that had virtually stalled amid widespread fears.

The program – which has swelled the Fed’s balance sheet to a record $6.6 trillion, according to Oxford Economics -- also has pushed down long-term interest rates, such as for mortgages.

The central bank also has taken rapid-fire steps to provide financing for distressed lending markets, including corporate bonds; small and midsize businesses; student, auto and credit card loans; money market mutual funds; and states and cities.

Its initiatives represent an urgent response to an abruptly engineered shutdown of much of the U.S. economy to contain the spread of the virus.

Since mid-March most states have ordered closures of nonessential businesses, such as malls, restaurants, movie theaters and sporting venues.

The business shutdowns, and their ripple effects on other industries, have led to massive job losses last seen during the Great Depression. About 26 million Americans have filed initial jobless claims, a reliable gauge of layoffs. The  unemployment rate – which climbed from a 50-year low of 3.5% in February to 4.4% in March – is expected to soar to 15% to 20% in the second quarter.

With the outbreak starting to ease across much of the country, states such as Georgia, South Carolina and Tennessee have started to allow many businesses to reopen.

Besides the Fed actions, Congress has approved about $3 trillion in programs to try to minimize the damage, boosting unemployment benefits and offering forgivable loans to businesses with fewer than 500 employees.

Assuming the pandemic continues to ebb and more businesses reopen by summer, the economy is expected to mount a strong recovery the second half of the year. But consumers are likely to remain wary until a vaccine is available, perhaps in a year, keeping the economy from returning to its pre-pandemic output level until late 2021, many economists say.

Powell said he worries most about long-term damage to the economy, such as extended unemployment and business bankruptcies.

"A person can lose skills that are needed, lose touch with the labor force and have a difficult time restarting his or her career," he said.

He added that minorities and other lower-income Americans who have made great strides during the record 10 1/2-year-old expansion are most vulnerable to setbacks.

"It's heartbreaking to see all of that threatened now," he said.

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