Fed’s Powell: Doing All We Can: Will it be Enough?

US Federal Reserve Chair Jay Powell has offered reassurance policymakers are not even “thinking about thinking” about raising rates and shared his worries about possible long-term post-crisis unemployment.

Answering questions after the Federal Open Market Committee reaffirmed that what it’s doing now it will keep doing as long as it takes, Powell acknowledged it’s been “heartbreaking” to see all the progress achieved versus joblessness disappear. Despite some resumption of commerce in all of the states and a May jobs report showing more than 3 million people returned to work, he said, “Activity in many parts of the economy has yet to pick up, however, and overall output is far below earlier levels.”

With uncertainty still the primary component of the near- and medium-term outlook, Powell several times returned to his concerns about how many people will be left without a job many months from now. “The May employment report of course was a welcome surprise,” he said, adding, “we hope we get many more like it…but I think we have to be honest that it’s a long road, it’s depending on how you account for well more than 20 million people displaced in the labour market. It’s going to take some time and we are going to be deploying our tools, all of our tools to their full extent in pursuit of that of those goals, however long it takes.”

US stocks at first reacted positively to the FOMC’s announcement that, as expected, there would be no change in the overnight federal funds rate and that the Fed will sustain its pace of purchases of Treasury securities and mortgage-backed securities instead of continuing the previous gradual downward trajectory.  The Dow industrials and S&P 500 instantly jumped into positive territory. The Nasdaq was already positive and held its gains through another record close.

Otherwise, gains faded after Powell had been talking about seven minutes, as he refrained from adding any new definition to the future composition of asset purchases or to the indefinite timeline of Fed recovery programs. The Dow ended down 1%, a loss of 282 points.

In the credit markets, the benchmark Treasury yield dropped steadily after the FOMC announcement to 0.736% as the price rallied modestly. The massive amount of Fed lending, Treasury paycheck supplements and Labor Department unemployment benefits make up “a good response and it’s having a big effect,” Powell said, however he warned, “You get to the question…is it going to be big enough?”

He continued, “I’ve been concerned about…this issue of longer run damage to the economy. We’re doing a fair job of getting through these first few months, more than a fair job. The question, though, is that group of people who won’t be able to go back to work quickly. What about them, and that could be many millions of people.”

Powell recapped the new “dot plot” of FOMC participants, including all the regional bank presidents, in which they saw no interest rate hikes “well through the end…of 2022, so I do think we’re in the right place now.” Actually two entries showed some small increase in that year.

He added the usual caution that there is no clarity to the path ahead and that individual forecasts were not the result of policy choices, just an input to the spectrum of plausible outcomes being considered. Other assumptions were a GDP declining 6.5% this year, a stark contrast to the last time the quarterly forecasts were tabulated, in December, when GDP was seen rising 2.0%.

The participants pegged the unemployment rate at 9.3% by the end of the year, an improvement into single digits but still seriously in the red. Personal consumption expenditure prices were seen up 0.8% at the end of the year with the core slightly higher, up 1.0%.

“Weak demand especially in sectors most affected by the pandemic is holding down consumer prices,” Powell said. “As a result inflation has fallen well below our symmetric two percent objective.” Indicators of longer term inflation, he said, have been “fairly steady.”

Powell returned to the question about how many of what he said may be 20 million to 24 million now jobless who will not have a job even after the worst of the pandemic’s economic effects have faded. “It’s too early to have a reliable estimate of that,” he said. “Clearly not everyone will go back. But I would say many will go back. But what’s going to be the remainder when, you know, when we reach sort of what is the new normal?

“It’s so uncertain but it could be a good number of millions of people,” he added.



Colin Lambert

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