Fed wrestles with its next moves as virus stalls US economy

Federal Reserve officials are grappling this week with timing and scope of ir next policy moves at a time when raging viral pandemic has weakened U.S. ecomy.

major changes are likely when Fed releases a statement Wednesday after its two-day policy meeting ends and just before Chair Jerome Powell holds a news conference. But central bank is working toward providing more specific guidance on conditions it would need to see before considering raising its benchmark short-term interest rate, which is w pegged near zero.

Ecomists call such an approach “forward guidance,” and Fed used it extensively after 2008-2009 recession. Fed probably won’t provide such guidance until its next meeting in September, ecomists say. But given signs that ecomy is stalling in face of pandemic and that several aid programs have expired as Congress debates ar rescue pack, re’s a chance that Fed officials could update ir guidance as early as Wednesday.

After its previous meeting last month, Fed h signaled that it expected to keep its key short-term rate near zero through 2022. Since n, pandemic’s threat to ecomy has appeared to worsen. According to minutes of ir June meeting , “various” Fed officials felt it would “be important in coming months ... to provide greater clarity” about future path of rates.

Some Fed watchers expect rate increase until 2024 at earliest given ir bleak outlook for ecomy and expectations of continued ultra-low inflation. But more specificity from Fed could provide furr assurance to businesses and households of a low-rate environment for years to come.

As pandemic intensified in March, central bank’s policymakers slashed ir key short-term rate to nearly zero and directed that Fed buy roughly $2 trillion of Treasury and mortg-backed securities. Those purchases were intended to ensure that lower borrowing rates would remain available for households and businesses to help spur spending and growth.

Fed also launched nine lending programs to enable businesses and Wall Street banks to borrow at low rates. On Tuesday, Fed said it would extend seven of those programs, which h been set to expire Sept. 30, through end of year.

One potential form of forward guidance would be for Fed to anunce that it won’t raise rates until annual inflation has reached or exceeded its target of 2% for a specific period. This would be intended to allow inflation to rise above 2%, to offset inflation that has fallen below that target nearly continuously since 2012. (Inflation is w running at just 0.5%, according to Fed’s preferred gauge.)

In recent speeches and appearances, Fed policymakers have sounded largely pessimistic about ecomy. Several, including Powell, warned in late May, as many states began allowing more businesses to reopen, that a resurgent virus could imperil any recovery.

Since n, confirmed case counts have soared around country, especially in such large Sun Belt states as Florida, Texas, Arizona and California, though ir case levels have generally flattened in past week. outbreaks have led at least 22 states to eir pause or reverse ir re-openings, reby forcing companies to impose layoffs or to stop hiring.

number of people applying for unemployment benefits has exceeded 1 million for 18 straight weeks. And or data, such as credit card spending, point to a pullback in spending.

Lael Brainard, a member of Fed Board of Goverrs, said earlier this month that resurgence of virus around country has underscored its severe threat to ecomy.

“ recent resurgence in COVID cases is a sober reminder that pandemic remains key driver of ecomy’s course,” she said in a speech. “A thick fog of uncertainty still surrounds us, and downside risks predominate.”

At his news conference Wednesday, Powell is likely to call for Congress to continue providing stimulus for ecomy, as he has done before. chairman has repeatedly stressed that Fed has “lending powers, t spending powers,” and while he has usually avoided supporting specific policies, he has clearly urged Congress to spend more.

“He’s really pivoted from being artful dodger to being quite direct,” said Diane Swonk, chief ecomist at Grant Thornton, a tax and accounting firm.