MNI REVIEW: Fed Sees Recovery Slowing, Vows Extended Stimulus

The gloomy U.S. outlook slowed further by a surge in Covid-19 requires more fiscal and monetary stimulus, Federal Reserve Chair Jay Powell said Wednesday after the FOMC held rates near zero and left the pace of QE unchanged.

Sparse details around strengthening forward guidance or adjusting asset purchases signals policymakers aren't close to agreement on their next moves. Powell instead drew attention to the emergency credit facilities already in place and reiterated the FOMC's commitment "to using our full range of tools to support the U.S. economy at this difficult time."

"We're in this until we're well through it," Powell told reporters via webcast to respect social distancing rules. "The economy will need highly accommodative monetary policy and the use of our tools for an extended period. We're absolutely committed to staying in this until we're very confident that that is no longer needed,"

The Fed's lending powers might not be the right answer compared with government aid to individuals and small businesses that "can address things that we can't address," Powell said. "Very likely there will be more needed from all of us."

LONG TAIL

Rising coronavirus cases have weighed down the recovery, Powell noted, citing high-frequency data like credit and debit card figures pointing to falling consumer spending and slower small business job growth. Hotel occupancy rates have flattened out and people aren't going to restaurants, pharmacies and beauty salons as much as before, the Fed chief said.

Even if the re-opening goes well, it's still going to take a "fairly long time" for high-contact areas of the economy to return to normal, Powell said. "There's probably going to be a long tail where a large number of people are struggling to get back to work because those heavily affected areas of the economy are going to be challenged really to employ the millions of people who are now out of work."

FORWARD GUIDANCE

Asked by MNI if the FOMC would consider setting goals on labor market conditions before it considers pulling back stimulus, Powell said the debate would continue at future meetings.

Forward guidance can be tied to dates or certain macroeconomic goals that can either be inflation or employment, Powell said. "I think there's attraction in all of those, depending on the situation," he said. "We haven't made any decisions on that."

Ahead of further forward guidance on rates and asset purchases, Powell said the Fed will complete its policy framework review. "To a very large extent the changes we'll make to the Statement of Longer Run Goals and Monetary Policy Strategy are really codifying the way we're already acting with our policies to a large extent we're already doing the things that are in there," he said.

Congress like the Fed needs to extend stimulus, Powell said, saying government actions so far have really helped the economy and further support remains "essential." His comments came hours after President Donald Trump said Republicans and Democrats remain far apart on closing the gap between stimulus proposals worth USD1 trillion and USD3.5 trillion, respectively.