By Jon Hilsenrath
The Federal Reserve kept its easy money policies in place,
saying that business activity has softened with the resurgence of
Covid-19 cases, but hoping the rollout of vaccines will tame the
pandemic and heal the economy.
Until then, the Fed is trying to boost economic activity as much
as it can.
The Fed last year cut short-term interest rates to near zero,
launched a bond-purchase program worth $120 billion a month and
said it would maintain these measures until its goals of lower
unemployment and 2% inflation are achieved.
Low rates and bond buying are meant to support borrowing,
spending and investment to support economic activity. For many
businesses and households, cheap credit is the lifeline to pay
bills until the economy returns to normal.
As coronavirus cases resurged in recent weeks, many states
responded with new business shutdowns and restrictions. Employment
and retail sales fell in December, and the number of Americans
filing new claims for unemployment benefits has been rising since
November. Though retail and restaurant activity has been soft,
manufacturing has been firmer.
"Following a sharp rebound in economic activity last summer, the
pace of the recovery has moderated in recent months, with the
weakness concentrated in the sectors of the economy most adversely
affected by the resurgence of the virus and by greater social
distancing," Fed Chairman Jerome Powell said at a press conference
after a two-day meeting with other Fed officials.
The central bankers hope the setback is temporary and have
signaled they have no intention of pulling back from their policies
until the economy -- and in particular the job market -- recover.
"There are people out there who have lost their jobs. It is
essential that we get them back to work as quickly as possible,"
Mr. Powell said.
Fed officials think the economy will bounce back later this
year, as vaccines are more widely distributed and begin to bring
the deadly coronavirus pandemic under control. That, in their
estimation, would allow restaurants, hotels, airlines and other
businesses to begin moving back toward operating at full
For now, the slow rollout of the vaccine has left Fed officials
cautious about the outlook for the next few months. "We think it's
going to be a struggle," Mr. Powell said. "The pandemic still
provides considerable downside risks to the economy."
The federal government has pumped trillions of dollars into the
economy to keep it afloat. In addition to the Fed's efforts to keep
interest rates low, Congress has approved several rounds of
spending and direct payments to households and businesses, with
more likely on the way.
Congress and the White House in December approved $900 billion
in new spending measures to address the pandemic and its economic
effects, including sending $600 checks to many Americans. The money
could pad household savings and lead to additional consumer
The Biden administration has proposed $1.9 trillion in
additional measures, including sending $1,400 checks to many
households, though its legislative fate is uncertain.
Mr. Powell signaled tacit support for additional spending
measures from Congress, saying they would "help households and
businesses weather the downturn as well as limit lasting damage to
the economy that could otherwise impede the recovery."
After a hectic 2020 putting in place its policies, Fed officials
are now watching to see the effects of these measures and whether
their economic projections prove correct.
The central bank estimates U.S. economic output will grow 4.2%
in 2021 and the unemployment rate will drop to 5% by year's end
from 6.7% in December. The Fed sees the jobless rate falling
further to 4.2% by the end of 2022.
There is a risk that all of the money that Washington is pouring
into the economy could lead to excessive inflation or some
speculative financial bubble.
The effects of the Fed's policies are already being felt in some
sectors that are especially sensitive to borrowing costs, such as
housing. Home prices in large metro areas were up 9.5% from a year
earlier in November, according to the S&P CoreLogic
Case-Shiller National Home Price Index. U.S. home sales in 2020
rose to their highest level in 14 years.
The borrowing rate on a 30-year fixed rate mortgage is around
2.75%, down from 3.6% a year ago, according to Freddie Mac, a large
government-backed mortgage company.
Stock prices are also running higher, as are prices for some
commodities, like copper and natural gas.
Brian Bethune, a Tufts University economics lecturer, said
stocks looked a bit overvalued now but weren't yet greatly
Mr. Powell also played down the risk of a dangerous asset
bubble. The home-price rise, for example, was in part a one-time
event associated with the pandemic, he said. "There was a lot of
pent up demand," he added. "The price increases are unlikely to be
Fed officials do expect consumer price inflation -- for goods,
like cars and clothing, and services, like haircuts and hospital
care -- to pick up in the months ahead, though they don't expect
that will be lasting either.
Consumer price inflation has run almost a half percentage point
below the Fed's 2% objective on average since it established that
goal in 2012.
Mr. Powell said the Fed wants to see inflation run a little
above that goal for some time to ensure it isn't stuck below that
target in the long run.
Write to Jon Hilsenrath at email@example.com
(END) Dow Jones Newswires
January 27, 2021 17:47 ET (22:47 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.