The Federal Reserve looks to be preparing for what may prove to be a slower-than-desired recovery, one in which the central bank takes a patient approach toward lifting any emergency measures it has taken this year.
Top Fed officials said May 21 that the outlook for the U.S. economy is "extraordinarily uncertain," and it will likely take time for the recovery to gather steam once the coronavirus passes. They also heard from local leaders, who detailed the severe toll the coronavirus is taking on their communities, where jobs have rapidly evaporated, household finances are strained and people of color are being hit the hardest.
The pandemic "poses the most serious threat" to the Fed's goal of maximum employment in modern times and makes the economic outlook highly uncertain, Fed Vice Chairman Richard Clarida said during a live-streamed New York Association for Business Economics event.
Fed Chairman Jerome Powell offered some hope at a virtual "Fed Listens" session the central bank hosted, saying the U.S. could get on the "road to recovery" soon. The event was a continuation of the Fed's 2019 community outreach sessions, where Powell noted a key takeaway had been the many benefits that the "tightest labor markets in 50 years" had brought to low- and moderate-income communities.
But the virus quickly wiped out any job gains over the past decade, Powell said, speaking hours after a report showed nearly 39 million people have filed for unemployment benefits over the last nine weeks.
"It's tragic, it's heartbreaking to see that go away," Powell said. "Our commitment, of course, is to get us back on the road to recovery and try to get back to that. We will not rest until we are back on that road, and we'll push as hard as possible."
The comments underscore that the Fed will continue responding aggressively to the pandemic and will be patient when it does begin to remove its support, analysts say. The central bank faced criticism for raising interest rates too early after the 2007-09 financial crisis, with critics saying the labor market still had plenty of room to improve and that inflation pressures had been largely non-existent when the first rate hike came in December 2015.
Fed Governor Lael Brainard, who moderated the Fed Listens session, has said that "a better alternative would have been to delay" the rate increases until the economy reached the Fed's goals of maximum employment and inflation around 2%. At their April 28-29 meeting, Fed officials discussed adding explicit thresholds when determining future rate increases, a move aimed at reinforcing to the public that rates would stay at their current near-zero levels for an extended period of time.
"It's hard to put an exact time table [on] how long the Fed will be on hold, but I would expect we're going to be at these levels for at least a couple of years," Greg Faranello, head of U.S. rates at AmeriVet Securities, said in an interview.
When the Fed does eventually raise rates from their current near-zero levels, it will do so with a keen awareness that "we don't really know" when the economy has reached full employment and may be starting to pose inflationary risks, Faranello added.
Powell described that as a "major takeaway" from the Fed Listens sessions during an event this month at the Peterson Institute for International Economics, saying he would probably place "less weight on real-time estimates" of full employment going forward.
Beata Caranci, chief economist at TD Economics, wrote in a note to clients the Fed will likely keep rates flat until 2022, and the risks to the economy are "skewed to the downside."
"This will make for a more patient Fed during the recovery to gain the confidence that the economy has clearly reached full potential before hiking interest rates again," she wrote.
'Real fear' that homelessness will rise
Fed officials worry that the toll of the crisis will "fall disproportionately on the most vulnerable and financially constrained households in the economy," according to minutes of their April meeting. The central bank got a reminder of those concerns during its May 21 event.
Amanda Cage, the president and CEO of the National Fund for Workforce Solutions, noted the disproportionately high number of coronavirus cases in African-American and Latino communities. The "jobs that sustained these neighborhoods disappeared overnight," and many entrepreneurs had to shutter their businesses, Cage said.
Many workers who were able to keep their jobs, such as grocery store employees and truck drivers, are being asked to "work more hours under riskier conditions," she added.
"These workers are really facing a difficult equation: risking their physical health or making ends meet," she said.
Congress' approval of one-time stimulus checks for most Americans and a $600-a-week boost to unemployment benefits have helped soften the blow, but the latter benefit is due to expire July 31 unless lawmakers extend it, said Pat Dujakovich, president of the Greater Kansas City AFL-CIO.
"So many people are living paycheck to paycheck," he said. "There's a real fear we'll see more homelessness when this is all over."