· Fed sees interest rates staying near zero through 2022, GDP bouncing to 5% next year
- The Federal Reserve voted Wednesday to keep benchmark short-term rates near zero.
- In addition to the rates move, the Fed said it would keep buying bonds, targeting $80 billion a month in Treasurys and $40 billion in mortgage-backed securities.
- On the economy, the Fed sees GDP tumbling 6.5% in 2020 but bouncing back to a 5% gain in 2021 followed by 3.5% in 2022, both well above the economy’s longer-term trend.
The Federal Open Market Committee met this week as states begin to reopen and after unemployment saw its worst monthly drop in history followed by its biggest gain. In addition, the meeting comes the same week the National Bureau of Economic Research declared that a recession started in February, ending the longest expansion in U.S. history.
The head of America's central bank has pledged to continue support for the US economy for "as long as it takes".
Warning that the US faces a "long road" to recovery, Federal Reserve Chair Jerome Powell said the bank would keep interest rates near zero for the foreseeable future.
Powell said the economic projections were made with the “general expectation of an economic recovery beginning in the second half of this year and lasting over the next couple of years, supported by interest rates that remain at their current level near zero.”
The Fed's "dot plot", which reflects the forecasts of the central bank's policy makers, isn't showing any rate hikes this year or in 2021. Even in 2022, the majority of policymakers believe rates will remain at the current rate levels.
They did release their forecasts this week. Here are the key numbers for 2020, followed by the next two years and the long-run projection:
Fed funds rate: 0%-0.25% through 2022, with the long-run rate at 2.5%
GDP: -6.5% in 2020, 5%, 3.5%, 1.8%
Unemployment: 9.3%, 6.5%, 5.5%, 4.1%.
Headline inflation: 0.8%, 1.6%, 1.7%, 2%.
Core inflation: 1%, 1.5%, 1.7%.
· Trump advisor Larry Kudlow: ‘Looks like we’ve hit a turning point’ in the economy
Larry Kudlow, director of the National Economic Council, told CNBC on Wednesday that the U.S. economy appears to have reached its lowest point due to the coronavirus.
“We still have a lot of hardship, and we have a lot of heartbreak in many areas. The numbers are still way too high on the unemployment and so forth,” Kudlow said on “The Exchange.” “But it looks like we’ve hit a turning point.”
Kudlow’s comments came after last week’s May jobs report showed a surprising gain in employment, when many economists had expected another dramatic decrease. The U.S. unemployment rate declined to 13.3%, from April’s 14.7%.
Kudlow said the small-business-focused Paycheck Protection Program “led directly” to May’s improved job landscape and argued additional people will be added back to payrolls in June as states further ease coronavirus-related restrictions on businesses.
· Dollar sinks to three-month lows as Fed keeps easing policy
The dollar extended losses, dropping to a fresh three-month low against a basket of major currencies on Wednesday after the Federal Reserve made no policy changes, as expected, and pledged to continue its asset purchases aimed at stabilizing a U.S. economy that has been ravaged by the novel coronavirus.
The Fed also did not announce any measures to cap the rise of bond yields, as some has speculated.
In a press briefing, Fed Chairman Jerome Powell said the committee did discuss controlling the yield curve but said its effectiveness remained an “open question.”
The greenback fell to three-month troughs against the euro, sterling and Swiss franc after the Fed statement. It slid to a three-week low versus the yen.
It also promised to maintain bond purchases at “the current pace” of around $80 billion per month in Treasuries and $40 billion per month in agency and mortgage backed securities.
He added that the Fed’s growth forecasts suggested a V-shaped recovery.
Overall, Chandler said the Fed statement showed that the dollar is still headed lower.
In mid-afternoon trading, the dollar fell about 0.4% against a basket of major currencies to 95.882 =USD, after earlier sliding to 95.714, a level not seen since mid-March.
The euro rose as high as $1.1422, sterling reached $1.2812, with the dollar hitting a three-month low of 0.9425 franc versus the Swiss currency.
The dollar also fell against the yen to a three-week low of at 106.99 JPY=EBS, and was last down 0.6% at 107.08 yen.
· U.S. inflation subdued with economy in recession
U.S. consumer prices fell for a third straight month in May and underlying inflation was weak as demand for goods and services remained subdued amid a recession caused by the COVID-19 pandemic.
The Labor Department said its consumer price index dipped 0.1% last month after plunging 0.8% in April, which was the largest decline since December 2008. Prices were held down by a 3.5% drop in the cost of gasoline, which followed a 20.6% plunge in April. That offset a 0.7% increase in the cost of food last month. Food prices jumped 1.5% in April.
· U.S. Treasury chief says considering more direct payments in next coronavirus aid bill
U.S. Treasury Secretary Steven Mnuchin said on Wednesday he would seriously consider more direct payments to individuals in the next phase of coronavirus rescue legislation, adding that funds should also be targeted to help sectors struggling to reopen, including hospitality and tourism.
· Pence says no rise in U.S. coronavirus cases seen yet due to protests
U.S. Vice President Mike Pence said on Wednesday there had been no sign yet of an increase in coronavirus cases from two weeks of nationwide protests over police misconduct and racism.
“What I can tell you is that, at this point, we don’t see an increase in new cases now, nearly two weeks on from when the first protests took effect,” Pence said in an interview on Fox Business Network.
· China’s producer prices fell in May as the coronavirus ravaged global demand
Producer prices in China have been hit by weak global demand due to the coronavirus pandemic, data showed on Wednesday.
The producer price index (PPI) fell 3.7% from a year earlier in May, according to data from the country’s National Bureau of Statistics. That was sharper than the 3.3% decline expected by economists polled by Reuters.
Economists at Capital Economics said in note after the data release that a ramp-up in policy stimulus to support the economy will likely help ease price pressures in the months ahead.
· Oil edges higher, even as U.S. inventory rise revives glut worries
Oil rebounded from earlier losses on Wednesday, even as U.S. data showed crude inventories rose to a record high, reviving worries of a persistent glut due to weak demand.
Crude stocks rose by 5.7 million barrels in the week to June 5 to 538.1 million barrels, according to a U.S. Energy Information Administration report.
Brent crude settled up 55 cents to $41.73 a barrel. U.S. West Texas Intermediate (WTI) rose 66 cents to $39.60 after falling more than 2% in the session.
Reference: CNBC, Reuters
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