NEWS & ANALYSIS

Fed Holds Policy Steady, Predicts Economy Will Bounce Back Later This Year


The Federal Reserve kept its policies in place, saying that business activity has softened due to spiking COVID-19 cases, but hoping that the widespread distribution of vaccines will heal the economy.

In the meantime, the Fed is working to boost economic activity as much as possible, the Wall Street Journal reports.

Last year, the Fed cut short-term interest rates to near zero, launched a bond-purchase program worth $120 billion a month and said it would maintain these measures until achieving its goal of lower unemployment and 2 percent inflation.

What does this do, exactly?

Low rates and bond purchasing are two measures to support borrowing, spending and investment, ultimately supporting economic activity.

As coronavirus cases spiked over the last few weeks, many states implemented new business shutdowns and restrictions. Employment and retail sales plummeted in December, and the number of Americans filing for unemployment has been on the rise since November.

“Following a sharp rebound in economic activity last summer, the pace of the recovery has moderated in recent months, with the weakness concentrated in the sectors of the economy most adversely affected by the resurgence of the virus and by greater social distancing,” Fed Chairman Jerome Powell said at a press conference.

“There are people out there who have lost their jobs,” he added. “It is essential that we get them back to work as quickly as possible.”

Perhaps the most important question is: when will the economy get back to normal?

Fed officials predict the economy will bounce back later this year with the increased distribution of vaccines. According to their estimates, that would allow restaurants, hotels, airlines and other businesses to operate at semi-full or even full capacity, the Wall Street Journal reports.

But, they predict it won’t be easy.

“We think it’s going to be a struggle,” Powell said. “The pandemic still provides considerable downside risks to the economy.”

The federal government has pumped trillions of dollars into the economy to keep it stable. Additionally, Congress has approved several rounds of spending and direct payments to household businesses, with more (hopefully) on the way – Biden proposed $1.9 trillion in aid, including $1,400 stimulus checks.

The central bank estimates U.S. economic output will grow 4.2 percent in 2021 and the unemployment rate will drop to 5 percent by the end of the year. Fed officials also expect consumer price inflation for goods and services to pick up in the months ahead, but expect it won’t last long.