Fed Sets Cautious Tone as Economic Momentum Slows

January 27, 2021 Updated: January 27, 2021

WASHINGTON—The Federal Reserve said on Jan. 27 that the U.S. economy is a long way from recovery as the resurgence in COVID-19 cases has weighed on economic activity and the labor market.

After the conclusion of the central bank’s two-day policy meeting, Fed officials announced that they would hold the target range for the federal funds rate at zero to 0.25 percent, as the pandemic continues to pose “considerable risks to the economic outlook.”

“The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic,” the Federal Open Market Committee (FOMC) statement read.

The Fed released its economic forecasts last month, upgrading its outlook for the labor market and the economy. Since the Fed’s Dec. 16 meeting, however, the economy’s momentum has reversed due to resurgence of the virus, which has prompted a series of renewed lockdown measures.

The economy lost 140,000 jobs and retail sales declined for the third consecutive month in December. Weekly initial jobless claims also remain elevated as companies struggle to recover, especially in the leisure and hospitality sector.

Fed Chairman Jerome Powell set a cautious tone about the near-term outlook, given concerning virus trends in the United States.

“A resurgence in recent months in COVID-19 cases, hospitalizations, and deaths is causing great hardship for millions of Americans and weighing on economic activity and job creation,” Powell said at a virtual press conference after the FOMC meeting.

He noted that the economy is a long way from the Fed’s employment and inflation targets, and hence the central bank “will continue to deliver powerful support to the economy until the recovery is complete.”

The central bank doesn’t predict any interest rate increases through 2023, according to its previous statements.

To reduce the economic damage caused by the pandemic, the central bank has been buying at least $80 billion per month in Treasuries and $40 billion in mortgage-backed securities since June last year.

Last month, the committee adopted qualitative outcome-based guidance for its asset purchases. The central bank announced that it would continue to increase its asset holdings at the current pace “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”

Medium-term prospects have substantially improved with the rollout of the vaccines, but Powell reiterated that it’s “premature” to talk about tapering off asset purchases.

“We’ll need to see actual progress. And when we see ourselves getting to that point, we’ll communicate clearly about it to the public. So nobody will be surprised when the time comes,” he said.

Powell also raised concerns about the slowness of the rollout of the vaccines and the arrival of new virus strains.

“There’s nothing more important to the economy now than people getting vaccinated,” he said. “We have not won this yet.”

Restrictions on bars and restaurants throughout the country due to the pandemic caused nearly 400,000 job losses in December.

“Although there has been much progress in the labor market since the spring, millions of Americans remain out of work. The economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been the hardest hit,” Powell said.

The Fed’s revised forecasts released in December show that the median projection for the unemployment rate for the end of 2021 was reduced to 5 percent from 5.5 percent projected in September.

Gross domestic product is expected to grow by 4.2 percent (median) this year, compared to a 4.0 percent growth projected in September. The central bank expects the economy to expand by 3.2 percent and 2.4 percent in 2022 and 2023, respectively.

Meanwhile, the Fed’s inflation projection rises to 1.8 percent in 2021, from 1.2 percent last year, and reaches 2 percent in 2023.

When asked about Janet Yellen, who was sworn in on Jan. 26 as secretary of the Treasury Department, Powell said, “I have the highest respect and admiration for Secretary Yellen. And I’m sure that we’re going to have a good working relationship together.”

Powell said he didn’t discuss emergency lending programs with the Treasury Department yet, but reiterated that Fed’s emergency lending tools will remain available if the need arises.

Follow Emel on Twitter: @mlakan