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Fed Admits More Money Is Needed To Save Economy

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Fed Admits More Money Is Needed To Save Economy

The Federal Reserve pumped $2.3 trillion into the economy in the last six weeks alone. Despite this, it believes it will probably take even more money to support the economy until it can fully recover from the coronavirus pandemic.

“I would say that it may well be the case that the economy will need more support from all of us if the recovery is to be a robust one,” Federal Reserve Chairman Jerome Powell said yesterday during a webcast with reporters. “We will continue to use our tools to ensure that the recovery, when it comes, will be as robust as possible.”

Diane Swonk, the chief economist at Grant Thornton, says that there is consensus among economists. Many believe that the Fed will need to inject at least another $2 trillion into the economy. This is if its goal is a soft landing after the worst of the outbreak passes.

Carl Tannenbaum, chief economist at Northern Trust, agrees, adding “It’s crystal clear [Congress and the White House] will need to do more,” like extending unemployment benefits and Congress “will need to get more money out the door for small business.”

Aiming for Stability

As expected, the Fed maintained its benchmark interest rate from 0 to 0.25%. It also said it would keep monetary policy steady until the economy goes back on track. This aims to achieve full employment and price stability.

The Fed does see headwinds for the recovery. “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,” it noted. It also said that a full recovery could slow economic growth for another year.

“The more significant comment is that the FOMC is concerned about the downside risk to the economic outlook over the medium term, suggesting they will remain extraordinarily accommodative in policy for several years to come,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

“When they stick their necks out and say they will use all their ammo,” LeBas said. “That’s a significant statement of support,” he continued.

“The Federal Reserve has shown it will do what is necessary to stem the economic fallout of coronavirus,” added Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence, and a former Fed adviser.

That “economic fallout” came into clear view yesterday. The Commerce Department reported that our nation’s gross domestic product declined at a 4.8% annualized rate in Q1.

An Economy Declining

That decline is especially significant since the country was essentially running at full speed. This went on until the last 2-3 weeks of the quarter as states started rolling out their stay-at-home orders.
That means the decline will be even worse this quarter. Powell also said he expects Q2 GDP to shrink by double digits along with a significant increase in unemployment.

Estimates vary widely — Goldman Sachs forecast a decline of 34 percent — but nearly every economist expects a massive decline.

Around 26 million Americans are currently unemployed. Because of this, Powell expects it will “take some time” for consumers to start spending again once the economy reopens. The unemployment figure is expected to balloon to 30 million after today’s figures are released.

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