By Greg Robb, MarketWatch
The Federal Reserve staff’s worst-case scenario for the economy is no recovery until next year, according to minutes of the central bank’s two policy meetings in early March, released Wednesday.
The staff economists told officials that there were two plausible scenarios for the U.S. economy grappling with the coronavirus outbreak. In one scenario, the U.S. economy would start to recover in the second half of the year. The more adverse scenario was an economic recovery “much slower to take hold and not materially under way until next year.” Under both scenarios, inflation moves lower.
Facing this uncertainty, Fed officials responded by slashing interest rates to zero and launching open-ended purchases of Treasury and asset-backed securities. Supporters of the full percentage-point cut on March 15 called it “forceful.” It brought the Fed funds rate to a range of 0% to 0.25% because the Fed had already cut rates by a half-point on March 3.
In the March 15 meeting, a “few” officials wanted to cut rates only by a smaller half-point, the minutes show. Cleveland Fed President Loretta Mester eventually voted against the decision for the larger cut.
During the discussion of the cut, several officials said they were worried the public would think the central bank would be out of ammunition with its benchmark rate essentially at zero. But some officials told their colleagues the Fed had other tools — using forward guidance or the Fed’s balance sheet — to ease monetary policy further. There was also a concern that the action might foster investor expectations of negative policy rates.
Since March 15, the Fed has taken several more steps to get funds into all corners of the financial system, introducing six lending facilities. The central bank is also working on a program to make loans to medium-size businesses.
Since the Fed meeting, jobless claims have skyrocketed, raising concerns about widespread pain in the economy.
Fed Chairman Jerome Powell is set to give an update on his view of the economic outlook on Thursday morning.
Roberto Perli, a former Fed staffer and now an analyst with Cornerstone Macro, said on Twitter he thinks the Fed has been caught off guard by how quickly the economy has deteriorated.
U.S. equity benchmarks were higher after the minutes were released at 2 p.m. on continued hopes the pandemic might ease and the shutdown of the economy might end. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.44% closed up 779 points in late afternoon trading to close above 23,000 for the first time since early March.