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The U.S. Federal Reserve on Wednesday warned that the COVID-19 pandemic poses "considerable risks" to the U.S. economy over the medium term while keeping its benchmark interest rate unchanged at the record-low level of near zero.
"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 Fed said in a statement after concluding a two-day policy meeting, adding the Federal Open Market Committee (FOMC), the Fed's policy-making committee, decided to maintain the target range for the federal funds rate at 0-0.25 percent.
"The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals," said the central bank.
The Fed noted that the virus and the measures taken to protect public health "are inducing sharp declines in economic activity and a surge in job losses," which have also significantly affected financial conditions.
The Fed statement came after the U.S. Commerce Department reported earlier in the day that U.S. real gross domestic product (GDP) in the first quarter contracted at an annual rate of 4.8 percent, the biggest quarterly decline since the 2008 financial crisis.
"Overall, economic activity will likely drop at an unprecedented rate in the second quarter," Fed Chairman Jerome Powell said Wednesday afternoon at a press conference.
"Both the depth and duration of the economic down turn are extraordinarily uncertain and will depend in large part on how quickly the virus is brought under control," he said, adding the central bank is committed to using full range of tools to support the economy in this challenging time.
In response to questions about medium term risks from the pandemic, Powell mentioned the risks related to the virus and potential future outbreaks, the damage to the supply side of the economy, as well as the drag from weakness in global economy.
"The chances are that it won't go right back to where we were because people will, until they are confident of that the virus is well and truly under control, then they will be somewhat reluctant probably to undertake certain kinds of activities," he said.
"We look for real GDP to contract at an annualized pace in excess of 20 percent in Q2-2020, but expect that a gradual recovery will begin in Q3 as the economy emerges from lockdown," Jay H. Bryson, acting chief economist at Wells Fargo Securities, wrote Wednesday in a report, noting there is "tremendous uncertainty" surrounding this outlook depending on how the pandemic evolves.
"Although it appears that the FOMC shares this uncertainty, it is also apparent that it is committed to do even more to support the economy, if necessary," Bryson said.
Diane Swonk, chief economist at Grant Thornton, a major accounting firm, said Powell has made it the Fed's mission to keep firms and households solvent through the crisis, but it cannot carry the economy alone.
"More is needed. The consensus among economists is that we will need another $2 trillion in aid and stimulus added to the nearly $3 trillion Congress has already approved," she said.
Powell also believed that further fiscal aid would be essential to a successful rebound from the economic downturn caused by the pandemic.
"This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible," he said.
The Fed cut interest rates to near zero at two unscheduled meetings in March and began purchasing massive quantities of U.S. treasuries and agency mortgage-backed securities to repair financial markets. It also unveiled new lending programs to provide up to 2.3 trillion U.S. dollars to support the economy in response to the coronavirus outbreak.
