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Epidemics

Federal Reserve Officials Paint Grim Picture of Economic Recovery

Strategic Insights

— 2 min read

Federal Reserve officials have indicated that the economic recovery from the pandemic-induced recession will be slow, with unemployment rates near 10% for years to come. The Fed chair, Jerome H. Powell, warned that the labor market may have hit bottom, but it's too soon to know for certain. The sober projections by the Fed depict a very different economic path from the quick "V-shaped recovery" suggested by President Trump. Mr. Trump has pointed to the stock market rally and the May jobs report as evidence that the economy is "back," but Mr. Powell was skeptical, saying that there is great uncertainty about the future given the unknowns about the coronavirus and whether people will feel comfortable resuming their previous day-to-day activities.

Key Takeaways:

  • The Federal Reserve expects the unemployment rate to remain elevated for years, coming in at 9.3% by the end of 2020 and 5.5% in 2022.
  • Fed officials indicated that rates will remain near zero for the foreseeable future, with no increase in borrowing costs through at least 2022.
  • The Fed's projections showed a sharp overall economic hit in 2020, with output expected to contract by 6.5% and then rebound by 5% in 2021.
  • Jerome H. Powell, the Fed chair, warned that the labor market may have hit bottom, but it's too soon to know for certain.
  • Mr. Powell said that there is great uncertainty about the future given the unknowns about the coronavirus and whether people will feel comfortable resuming their previous day-to-day activities.
  • The Fed will do "whatever we can, and for as long as it takes," to support the recovery, including buying large quantities of bonds and leaving interest rates near zero for a long time.
  • Steven Mnuchin, the Treasury secretary, suggested that a rebound was unlikely to be fast or even, particularly for hard-hit industries such as travel, leisure, and hospitality.
  • The Organization for Economic Cooperation and Development (OECD) warned that the world economy faced the most severe downturn in a century and could experience a halting rebound.
  • The Fed has taken far-reaching steps to support the U.S. economy, including cutting interest rates to near zero and buying government-backed bonds to keep markets functioning normally.

Statistics:

  • Unemployment rate: 14.7% in April, 13.3% in May, and expected to be 9.3% by the end of 2020 and 5.5% in 2022.
  • Economic contraction: 6.5% at the end of 2020, rebounding by 5% in 2021.
  • Federal Reserve's economic forecasts: 6.5% contraction in 2020, 5% rebound in 2021.
  • Number of people displaced: "Somewhere short of 25 million people have been displaced."
  • Pace of recovery: "Extraordinarily uncertain" and dependent on policy actions taken at "all levels of government."

Sources:

  • The New York Times, "Federal Reserve Officials Paint Grim Picture of Economic Recovery" by Jeanna Smialek, Stanley-Becker and Alan Rappeport, published on May 13, 2020.
  • Organization for Economic Cooperation and Development (OECD), "OECD warns of "shock" to the global economy and a possible recession" by Laurence Boone, published on May 13, 2020.

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