(Reuters) – The Federal Reserve expects U.S. household finances and business balance sheets to grapple with “persistent fragilities” as a result of the shock to economic activity arising from the coronavirus pandemic, the central bank said in a report to Congress on Friday.
In its twice-annual Monetary Policy Report to U.S. lawmakers, the Fed also reinforced expectations for a sharp decline in economic activity in the current quarter. Recent data suggests “real gross domestic product will contract at a rapid pace in the second quarter after tumbling at an annual rate of 5% in the first quarter of 2020.”
The report comes two days after the Fed wrapped up its latest two-day policy meeting and signaled the U.S. economy faces an arduous and uncertain recovery from the recession triggered by the coronavirus pandemic.
“It is a long road. It is going to take some time,” Fed Chair Jerome Powell said in a webcast press conference after the meeting. “We can use our tools to support the labor market and the economy and we can use them until we fully recover.”
The release of the report precedes two days of testimony by Powell before congressional committees next week, scheduled for Tuesday and Wednesday.
In their economic projections released on Wednesday, the first since December, Fed policymakers saw the economy shrinking at a 6.5% annualized rate in 2020 and the unemployment rate at 9.3% at year’s end, down from 13.3% in May but more than two and half times the 3.5% rate in February, when a record-long economic expansion ended abruptly in the face of the pandemic.
While officials saw growth snapping back somewhat in 2021, with gross domestic product seen rising at a 5% annualized pace, they projected the jobless rate would remain elevated at 6.5%.
That somber assessment of the outlook doused much of the optimism for a fast recovery that had been sown by the surprise growth in employment in May and factored heavily in Thursday’s dramatic sell-off on Wall Street, when U.S. stocks fell by the most since March.
On Friday, stocks were higher but at late-morning had retraced only a fraction of Thursday’s 5.9% drop in the S&P 500 Index <.spx>.
Powell and his colleagues have repeatedly reinforced their pledge to use all the tools at their disposal to foster a rebound. Since March, the Fed has slashed its benchmark overnight lending rate to near zero and rolled out nearly a dozen emergency programs to stabilize financial markets and provide credit for firms in need of capital to survive the downturn.
According to this week’s projections, all 17 current Fed policymakers see the key overnight interest rate, or federal funds rate, remaining near zero through next year, and 15 of 17 see no change through 2022.
(Reporting By Dan Burns; Editing by Andrea Ricci)
