WASHINGTON (AP) — The Federal Reserve signaled Wednesday that it will keep its key short-term interest rate near zero for the foreseeable future as part of its extraordinary efforts to bolster an economy that is sinking into its worst crisis since the 1930s.
The Fed noted the gravity of the crisis that has gripped the economy in the face of the coronavirus outbreak and made clear it would continue to do all that it could to provide support. But at a news conference, Chairman Jerome Powell also made a forceful, if indirect, plea for Congress to spend as much as necessary to aid workers and businesses until the economy can start to recover — and not fret about the likely cost. Congress has already approved more than $2.5 trillion in rescue programs.
Powell urged lawmakers to enact “policies that protect workers, businesses, and households from avoidable insolvency. … that allow them to hold onto workers or rehire them.”
The chairman did not explicitly mention the need for aid to state and local governments, a subject of contention in Congress. Yet many economists have warned that states and cities urgently need more financial help to avoid layoffs and spending cuts that would deepen the economic downturn.
Unlike Congress, the Fed’s powers are limited, Powell noted, by the fact that it can provide only loans, not grants. And for many businesses that are struggling to survive, additional debt isn’t a good option. Even so, the chairman stressed that the Fed would continue to provide whatever support it can through an array of emergency lending and bond buying programs.
“We will use our powers forcefully, proactively, and aggressively until we’re confident that we are solidly on the road to recovery,” he said.
Powell cautioned that the recovery was unlikely to be a swift or a robust one, given the depth of the U.S. economic crisis, with perhaps 30 million people having lost jobs in the past six weeks.
“It will probably take some time for us to get back to a more normal level of employment and ultimately maximum employment,” he said.
Under Powell, the Fed is confronting a deeply perilous moment for an economy that had looked robust just a few months ago. Since the virus struck with full force last month, widespread business shutdowns have likely pushed the unemployment rate as high as 20%. As layoffs mount, retail sales are sinking, along with manufacturing, construction, home sales and consumer confidence.
At his news conference, the chairman noted that layoffs have struck hardest at the lowest-income American workers, many of whom had just begun to make progress in the 11th year of an economic expansion that has now ended.
“It is heartbreaking to see that is threatened now,” Powell said.
During two emergency meetings in March, the Fed cut its benchmark rate to a range between zero and 0.25%. It has also announced nine new lending programs to pump cash into financial markets and provide support to large and medium-sized businesses as well as cities and states.
In its statement Wednesday, the Fed said it will also keep buying Treasury and mortgage bonds to help keep rates low and ensure that companies can lend easily to each other. It did not specify any amounts or timing for its bond purchases.
The Fed said, as it did last month, that it will keep its rate at nearly zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
Asked about eventually lifting rates, Powell made clear that that wouldn’t happen for many months at least.
“We are going to wait until we are quite confident the economy is on the road to recovery,” he said.
The Fed’s statement came on the same day that the Commerce Department released grim news about the economy: Economic output shrank at a 4.8% annual rate in the first three months of the year — the worst showing since the Great Recession struck near the end of 2008. The economic picture is expected to grow ever darker, with the economy forecast to contract at a shocking 30% to 40% annual rate in the April-June quarter. The unemployment rate could reach 20% when April’s jobs report is released next week.
The Fed announced earlier this month that it will buy corporate bonds and lend to states and cities — two actions it has never previously taken. As part of a $2.3 trillion lending program, the Fed has said it will buy up to $500 billion in state and local municipal bonds. It has also unveiled a Main Street Lending Program, which will lend $600 billion to medium-sized companies of up 10,000 employees.
As economic activity has collapsed, inflation has also begun to fall. Economists expect it to drop below 1% by next year, far under the Fed’s 2% target level. That poses another problem for the Fed: Declining prices can eventually lead consumers to delay spending, thereby slowing the economy further.
Indeed, in its statement, the Fed raised concerns about slowing inflation, which is likely to sink further below its 2% target level in the coming months.
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AP Economics Writer Martin Crutsinger contributed to this report.
