MNI REVIEW: Fed Vows Forceful Action Through Covid-19 Slump

By Pedro Nicolaci da Costa

     WASHINGTON (MNI) - Fed Chair Jerome Powell is readying new credit

facilities and vowed to use the full range of tools to combat the coronavirus

slump, saying it's vital to ensure workers aren't permanently scarred by layoffs

and to keep deflation out of the picture.

     "We have a number of dimensions on which we can still provide support to

the economy," Powell told reporters during a Wednesday press conference after

holding interest rates close to zero. "Our credit policies are not subject to

specific dollar limits. They can be expanded and we can do new ones."

     The Fed will learn from the demand for individual programs and is willing

and able to adjust measures targeting everything from commercial paper to money

markets. The Fed will produce a new term sheet for its unprecedented Main Street

lending program soon, Powell said, and praised fiscal policy makers for taking

on more risks to deal with the slump.

     The FOMC'S assessment of the outlook was glum, a far cry from recent

optimism among some officials about a fairly rapid rebound. Powell still

suggested there is potential for the economy to start turning around in the

third quarter after a historic decline.

     --OVERHAULED STATEMENT

     "The ongoing public health crisis will weigh heavily on economic activity,

employment, and inflation in the near term, and poses considerable risks to the

economic outlook over the medium term," the FOMC said in a sharply overhauled

statement.

     "We have done a lot of thinking about what monetary policy might look like

over coming months, and that would depend on where we are in a range of

potential economic scenarios," Powell said.

     He downplayed the prospect that the economy would return to record low

unemployment numbers solidly below 4% seen before the pandemic. The U.S. economy

shrank 4.8% in the first quarter, the worst decline since late 2008, and is

forecast to contract further. Unemployment is expected to surge into the double

digits.

     "I don't think it will get anywhere near the historically low levels that

we had as recently as February," said Powell, citing a reading of 3.5%. "It will

take time for that to happen for to us get back to anything that resembles

maximum employment."

     --HOLDING ZERO

     The Fed maintained a commitment to keeping rates at zero and purchasing

bonds until the economy appears to be on track to a full recovery.

     The central bank's statement outlined the risk of weak inflation, while

Powell told reporters the risk of a dangerous burst of deflation is unlikely.

"As long as inflation expectations remain anchored, then we shouldn't see

deflation, and the Federal Reserve is strongly committed to maintaining 2

percent inflation over time. We will be there to work on that," Powell said. He

also hopes people "would see through" any bout of falling prices linked to a

plunge in energy. 

     "Weaker demand and significantly lower oil prices are holding down consumer

price inflation," the Fed's policy statement said. "The disruptions to economic

activity here and abroad have significantly affected financial conditions and

have impaired the flow of credit."

     The Fed has launched a string of emergency loan programs in a matter of

weeks, reviving some facilities of the 2008 crisis and carving out new ones,

including Treasury-backed purchases of corporate and municipal bonds. Market

conditions have improved to some extent, but officials are leery of other

disruptions.

     "We are committed to using our full range of tools to support the economy

in this challenging time, we are going to use them forcefully, proactively and

aggressively until we are confident that we are solidly on the road to

recovery," Powell said. "We are not going to be in any hurry to move rates up."

--MNI Washington Bureau; +1 202 371 2121; email: pedro.dacosta@marketnews.com

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