US economy to shrink 6.5% in 2020, no rate hike through 2022: Fed officials

The Federal Reserve states it will keep purchasing bonds to maintain low borrowing rates and support the U.S. economy in the middle of a recession. And it tells nearly all the Fed’s policymakers foresee no rate hike through 2022.

The Fed has cut its short-term benchmark rate to near zero. Following its rate ultra-low for more than two more years could make it easier for consumers and businesses to borrow and spend enough to sustain an economy depressed by business shutdowns and high unemployment.

The central bank wrote in a statement after its policy meeting ended Wednesday that the viral outbreak has created a sharp decline in economic activity and surge in job losses.

Fed officials estimate that the economy will shrink 6.5% this year, in line with other forecasts, before expanding 5% in 2021. It foresees sees the unemployment rate at 9.3%, near the peak of the last recession, by the end of this year. The price is now 13.3%.

Since March, the Fed has slashed its short-term benchmark rate, bought $2.1 trillion in Treasury and mortgage bonds to inject cash into markets and rolled out nine lending programs to try to keep credit flowing smoothly. Most critics expect the Fed to pause and assess the economic landscape before starting on any further actions, which could come at September’s meeting.

The Fed’s actions are credited with having helped fuel an extraordinary rally in the stock market, which has nearly recovered its pre-pandemic high after a dizzying fall in March.

And by committing to buy corporate bonds, through reinvigorating the market for such securities, the Fed has also ensured that corporations can continue to borrow. Its initiatives also include a first-ever program through which the Fed is buying state and local government debt to support the municipal bond market.

Many economists assume those steps have limited the downturn from worsening by keeping credit flowing. This week, the National Bureau of Economic Research, the official arbiter of recessions, announced that the U.S. economy entered a recession in February.

One challenge for the Fed now is to shift its focus from the emergency actions it took in March and April to try to carry the economy through a shutdown, to what steps it will take to stimulate recovery as businesses increasingly reopen.

In remarks last month, Fed Vice Chair Richard Clarida stressed that the viral outbreak remains a menace to the economy. But he also indicated that Fed officials want to see a few more months of data to gauge the economy’s health before determining their next steps.