WASHINGTON – The Federal Reserve has largely calmed turbulent financial markets. Yet a far tougher task remains: Helping rescue an economy and job market that appear to be free-falling into the worst catastrophe since the Great Depression.
Fed policymakers will meet Tuesday and Wednesday against a backdrop of dismal data: More than 26 million Americans have applied for unemployment benefits since the coronavirus forced widespread business closures. Retail sales have dropped by a record pace. Home sales have plunged.
In the meantime, inflation has started to fall amid the collapse in economic activity and is sure to sink further below the Fed's 2% target level. With beleaguered hotels, airlines and retailers slashing prices, inflation could fall to 1% or less by year's end. That poses another problem for the Fed: Declining prices can eventually lead consumers to delay spending, thereby slowing the economy further.
In response, the Fed has slashed its benchmark interest rate to near zero in two emergency moves and launched an alphabet soup of lending programs — nine in total — to pump cash into financial markets. The central bank has also bought about $1.4 trillion in Treasury securities to ensure that banks can swap Treasurys for cash and keep rates low.
Chairman Jerome Powell isn't expected to announce any major new initiatives when the Fed's meeting ends Wednesday. The central bank may provide more details on its lending programs and may also fill in some specifics about its Treasury-buying program, which is now essentially unlimited.
Economists will also look for any changes the Fed may make to where it stands on interest rates. At its meeting last month the Fed said it will keep rates at near zero “until it is confident that the economy has weathered recent events."
In the past, the Fed has sometimes set a time frame for future rate hikes, and in other cases has set out conditions, such as the unemployment rate falling to a certain level. But few analysts forecast anything specific Wednesday. Economists at Bank of America said they expect the central bank to simply acknowledge that rates will remain ultra-low for “an extended period.”
Powell will also likely face questions about the extraordinary actions the Fed has taken during this crisis, including unleashing lending programs that will directly aid individual cities and businesses, a step beyond its usual assistance to banks and credit markets. These interventions have exposed the central bank to concerns that it will inevitably favor some companies or municipalities over others. The Fed, whose independence is seen as vital to its role in the financial system, has always steered clear of such potentially politicized actions.