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July 29, 2020, 5:39 p.m. EDT

Fed’s Powell sees U.S. economy flattening as coronavirus cases rise

The path of the U.S. economy is tied the course of the virus, central bank says

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By Greg Robb, MarketWatch


Samuel Corum/Getty Images
Federal Reserve Board Chairman Jerome Powell speaks during a news conference after a Federal Open Market Committee meeting on January.

Federal Reserve Chairman Jerome Powell said Wednesday that the sharp acceleration in COVID-19 infections since mid-June is restraining the ability of the economy to recover from the historic contraction in economic activity in the second quarter, when all non-essential businesses shut down.

“On balance, it looks like the data are pointing to a slowing in the pace of the recovery. But I want to stress it is too early to say both how large that is and how sustained that will be,” Powell said at a press conference..

The path of the U.S. economy is going to “depend significantly on the course of the virus,” the Fed said in its policy statement. The measures taken to keep it in check are critical, Powell said.

Economists say U.S. GDP likely sank a record 35% in the second quarter after the coronavirus ravaged the economy.

“This pandemic and its fallout really represents the biggest shock to the U.S. economy in living memory,” the Fed chairman said.

Job gains in May and June have reversed about a third of the job losses, and consumer spending has reversed about half of its decline, he said.

But reports that companies are cutting wages shows how far the labor market has to go to recover, he added.

Powell said that it is likely the economy will need more assistance from the Fed and from Congress. He praised lawmakers for their earlier relief packages.

The Fed “is committed to using our full range of tools to support the economy and help assure that the recovery from this difficult period will be as robust as possible,” Powell said.

Drew Matus, chief market strategist for MetLife Investment Management, said Powell had no choice but to be dovish. “His only choice was the reassure the markets that the Fed will do whatever it takes to keep the economy on an even keel. Anything besides that was going to end up backfiring,” Matus said in an interview.

“The Fed is acting as a firefighter. The fire is already happening. The best thing then can do is to try to limit the damage,” he added.

Economists are also worried because the latest unofficial data suggests the U.S. economy is sagging again as coronavirus cases increase, mainly in the South and West.

In a unanimous decision, the Fed voted to keep its federal funds rates close to zero and again said it would keep interest rates near zero until employment recovers and inflation picks up .

The central bank also kept the pace of its asset purchases steady at $120 billion per month. The Fed is buying $80 billion of Treasurys and $40 billion of asset-backed mortgage securities to keep financial markets operating smoothly.

Earlier this week, the Fed extended seven emergency lending facilities designed to help markets for three months until the end of the year. Some of these programs crossed a previous red line for the Fed in buying corporate and municipal bonds and lending to medium-sized businesses. Powell said these programs would continue until the Fed was confident the economy was “solidly on the road to recovery.”

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