Business

U.S. Federal Reserve leaves rates near zero as COVID-19 savages U.S. economy

The Federal Reserve, which has pumped trillions in emergency funding into U.S. financial markets to stem the damage from the coronavirus pandemic, left interest rates near zero on Wednesday and repeated a vow to do what it takes to shore up the economy.

Economists forecast sharpest downturn in U.S. history this quarter

A man rides a bike in front of the Federal Reserve Board building in Washington, D.C.. The Fed announced they will leave interest rates near zero, as over 26 million Americans have filed for unemployment benefits since March 21. (Brendan McDermid/Reuters)

The U.S. Federal Reserve, which has pumped trillions in emergency funding into U.S. financial markets to stem the damage from the coronavirus pandemic, left interest rates near zero and repeated a vow to do what it takes to shore up the economy. 

The central bank says the pandemic will "weigh heavily" on the near-term outlook and poses "considerable risks" for the medium term.

"The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals," the Fed said in a statement following a two-day policy meeting held via video conference.

Earlier Wednesday, the Commerce Department reported the economy contracted in the first quarter at its sharpest pace since the Great Recession, ending the longest economic expansion in the nation's history.

That reflects a plunge in economic activity in the last two weeks of March, which saw millions of Americans seeking unemployment benefits.

The rapid decline in GDP has left economists bracing for a record slump in output in the second quarter.

"If the economy fell this hard in the first quarter, with less than a month of pandemic lockdown for most states, don't ask how far it will crater in the second quarter, because it is going to be a complete disaster," said Chris Rupkey, chief economist at Mitsubishi UFJ Financial Group in New York.

COVID-19 ends economy's longest expansion period

Plunging consumer spending on the back of widespread stay-at-home orders to curb the spread of the virus helped drive a 4.8 per cent decline on an annualized basis in first-quarter gross domestic product. The economy, which grew at a 2.1 per cent rate in the fourth quarter, was in its 11th year of expansion, the longest on record.

An increasing number of U.S. states are reopening their economies or at least setting out plans for easing stay-at-home restrictions, leading to fears there could be a resurgence of infections over the coming months and a headache for the Fed as it seeks to estimate the swiftness of the economic recovery.

With so much uncertainty around the economic outlook, the Federal Reserve said it expects to maintain the target range for its benchmark overnight lending rate "until it is confident that the economy has weathered recent events."

Florida Gov. Ron DeSantis, left, met with U.S. President Donald Trump on Tuesday to discuss ways that Florida is planning to gradually reopen the state. An increasing number of states have made similar plans in recent weeks. (Doug Mills/The New York Times/Pool/Getty Images)

The statement reflects a sharp downgrade in the Fed's assessment of the job market, household spending, energy markets and the outlook for inflation since its last meeting in March, before most U.S. states had done much to curtail economic activity and put the brakes on the exploding outbreak.

Last month, the Fed said only that it will keep rates near 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."

It slashed rates to near-zero in March and rolled out a mix of new and refurbished crisis programs aimed at shoring up credit markets and backstopping companies and local governments reeling from forced shutdowns and sharp drops in revenue.

Economy will rally, says Fed chair

Fed Chair Jerome Powell held a news briefing following the meeting, and warned the economy will decline at an "unprecedented rate" in the current quarter.

But Powell also said the economy will pick up as lockdown restrictions are lifted and vowed the central bank would continue to support the recovery.

"[The Fed has] really put themselves in the forefront of trying to lead this recovery back," said Rick Meckler, partner at Cherry Lane Investments in New Vernon, N.J. "They have been aggressive and probably are a big reason for some of the strength the market has shown even in light of some really negative economic news."

Federal Reserve Chairman Jerome Powell said Wednesday that the economy will decline at an 'unprecedented rate' this quarter, but is expected to rally as lockdown restrictions are lifted. (Eric/Baradat/AFP/Getty Images)

The market did rally on Wednesday. U.S. stocks surged following drugmaker Gilead Sciences' announcement that its drug remdesivir is showing promise as a potential COVID-19 treatment, giving a boost to the broader market and sending its shares up 5.7 per cent.

The Dow and S&P 500 are both within 20 per cent of their record levels, with the tech-heavy Nasdaq now within 10 per cent of its high.

Meanwhile, the depth of the economic slowdown is starting to become clear, with more than 26 million people filing new claims for unemployment benefits since March 21. But the Fed and other analysts are still trying to get a handle on the likely shape of the recovery.

Most U.S. states still have stay-at-home measures, though a handful are beginning to reopen even as cases of COVID-19, the respiratory illness that has killed more than 57,000 people in the United States, continue to grow.

Many health experts have also begun to predict a seasonal resurgence of COVID-19 in the fall, whatever containment measures are put in place, raising the possibility that stay-at-home restrictions may need to be reintroduced, and with them, a new downturn in economic growth.

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