Fed says data point to slowing recovery as virus cases spike

The Federal Reserve voted to leave its benchmark interest rate unchanged at the end of its two-day policy-setting meeting on Wednesday. And though the Fed noted minor improvements in the United States economy since lockdowns swept the nation in March, it says there is a long way to go before it recaptures its pre-pandemic strength. 

“Even with the improved economic news in May and June, overall, activity remains well below its level before the pandemic. And the contraction in real GDP in the second quarter will likely be the largest on record,” Fed Chairman Jerome Powell told reporters during a webcast following the meeting. 

The nation’s crawl out of the recessionary hole it officially entered in February has become increasingly precarious as coronavirus cases spike in parts of the US, leading cities and states to either postpone or roll back the lifting of lockdown restrictions. 

Noting the Fed’s increasing reliance on so-called “high-frequency” data that measures things such as consumer spending based on debit and credit card transactions, Powell said: “What that data show on balance is that the pace of the recovery looks like it has slowed since the cases began that spike in June.”  

The latest reading on consumer confidence from the Conference Board also signalled that consumers – whose spending drives some two-thirds of US economic growth – are growing weary as the jobs market recovery falters and infection rates climb. 

“I would be remiss in not stressing this enough; the path of the economy is going to depend to a very high extent on the course of the virus and the measures that we take to keep it in check,” Powell said.  

By unanimously voting to keep the target range for the federal funds rate within 0-0.25 percent, Fed officials are signalling their unequivocal determination to keep borrowing costs low to support the world’s largest economy as it wrestles with the continuing fallout of the coronavirus pandemic.

The Fed chief also said the US central bank will continue its bond-buying programme and other measures over the coming months to ensure that credit keeps flowing easily to US businesses and households. And that it still has more policy tools it can deploy if needed to support the economy. 

“We’re absolutely committed to staying in this until we’re very confident that that is no longer needed,” Powell said. “We’re in this until we’re well through it.” 

The nation’s labour market recovery has turned increasingly fragile as infections surge in some states. After a brief uptick at the start of June, job openings started to decline, while initial jobless claims filed with states – a proxy for layoffs – rose for the first time in nearly four months for the week ending July 18th. 

Roughly 30 million Americans are collecting unemployment benefits from state and federal programmes – but their income is set to tumble dramatically. The $600 federal weekly top-up to state benefits that was included the round of virus relief Congress passed in March effectively ended last week.

And Republicans and Democrats in Congress cannot agree yet on the way forward. 

Democrats would like to see the $600 top-up extended through to January of next year. Republicans want to see it slashed to $200 a week through September and then have states bring the combined state and federal payment to 70 percent of prior wages with the top-up capped at $500 a week.

Powell noted during his press conference that the rise in joblessness has been “especially severe for lower-wage workers, for women, and for African Americans and Hispanics”.