By Nick Timiraos
WASHINGTON -- The Federal Reserve said the coronavirus pandemic poses considerable risks for the U.S. economy despite recent gains, and officials made no changes on Thursday to their commitment to provide sustained stimulus.
"The ongoing public health crisis will continue to weigh on economic activity, employment and inflation," the central bank said in a policy statement after concluding a two-day meeting.
In September, Fed officials pledged to support the recovery by setting a higher bar to raise interest rates and by signaling it expected to hold rates near zero for at least three more years.
At that meeting, the Fed laid out three thresholds for raising rates, including evidence of a tight labor market, annual inflation of at least 2%, and forecasts that inflation would run moderately above 2%.
Officials didn't make any changes to that policy on Thursday.
"Economic activity has continued to recover from its depressed second quarter level," said Fed Chairman Jerome Powell at a news conference after the meeting. "In recent months, however, the pace of improvement has moderated."
Fed officials likely continued discussions this week over how to provide more support to the economy should the recent rebound fizzle. They have had their eye on two prominent risks since the summer: that growth would falter amid rising virus infections and that Congress would fail to deliver additional spending to support unemployed workers, hard-hit businesses and state and local governments.
Mr. Powell said the recent upswing in virus cases was "particularly concerning" and urged Americans to stay vigilant in the coming months. "All of us have a role to play in our nation's response to the pandemic, " he said. Wearing masks in public "will help get the economy back to full strength."
The policy makers have been surprised through the late summer and early fall by the degree to which economic activity held up despite higher infection counts.
On the other hand, negotiations between Republicans and Democrats over how much more to spend on pandemic relief measures have stalled. Several Fed officials have said their forecasts for continued growth are premised on additional government spending; they met this week without knowing the outcome of Tuesday's elections, which will shape the contours and timing of any fiscal package.
"The elephant in the room is the fiscal outlook," said James Sweeney, chief economist at Credit Suisse.
One reason Fed officials have been so outspoken about the need for additional government spending is because their stimulus tools are reaching the limits of what they can provide and because those tools are poorly suited to addressing the fallout from the pandemic, economists said.
"Central banks are impotent in this. The only thing you can do from a governmental standpoint is transfer income," said Steven Blitz, chief U.S. economist at research firm TS Lombard.
Mr. Blitz said he worries about new weakness as state and local governments address large revenue declines by laying off workers. He also fears business failures will result in more defaults on commercial property debts held by small and midsize banks. "Fiscal failure at this juncture will lay bare the weakness in monetary policy, and with that will come bank failures -- on Main Street, first," said Mr. Blitz.
Central banks took aggressive actions earlier this year after the virus upended daily life and forced curbs on economic activity with no precedent in peacetime. With the virus surging again in Europe, some are expanding stimulus measures.
Earlier Thursday, the Bank of England announced another dose of bond purchases as officials said they expect the U.K. economy to shrink in the final quarter of 2020. England moved Thursday into a four-week lockdown to slow the rate of infections, following earlier measures by the rest of the country.
The BOE agreed to another GBP150 billion of U.K. government bond purchases, equivalent to $195 billion. It takes the overall size of the BOE's portfolio of government and corporate assets to GBP895 billion.
The Reserve Bank of Australia on Tuesday cut its official cash rate to near zero and announced a 100 billion Australian dollars, equivalent to $70.57 billion, quantitative-easing program as it seeks to shore up the economic recovery that is tentatively emerging across the country.
The European Central Bank last week said it intends to scale up its support of the eurozone's economy in December with a package that could include billions of dollars of new bond purchases as well as an interest-rate cut and cheaper loans for banks.
Fed officials cut interest rates to zero in March and expanded their asset portfolio to $7 trillion in June from $4 trillion before the pandemic hit. They launched an array of emergency lending programs in the spring. They unveiled a new policy framework in August and formalized new interest-rate guidance in September.
Officials have said they would resume deliberations over possible refinements to their buying of government assets, including the maturity profile of Treasury purchases and any guidance on how long those purchases might continue. The Fed has been buying $80 billion in Treasurys a month and $40 billion in mortgage bonds, net of redemptions, since June after buying even larger quantities beginning in March to curb market dysfunction.
Officials haven't indicated how long they plan to continue these purchases or whether they will change the composition of those purchases to target longer-term securities, as they did in their 2012-14 bond-purchase program. Several Fed officials have said the low level of long-term Treasury yields makes this a less pressing matter.
Analysts also said there was little urgency for the Fed to make further announcements Thursday given the central bank's recent steps to fortify its guidance on short-term rates.
"While there are obviously concerns" about reduced fiscal support slowing the economy, "those things haven't been strongly reflected in the data yet," said Lewis Alexander, chief U.S. economist at Nomura Securities. Moreover, as long as long-term rates remain near their current, historically low levels, "they don't have a lot more they can do," said Mr. Alexander.
A separate question surrounds what the Fed will do with the scheduled expiration on Dec. 31 of the central bank's emergency loan programs. While the programs have resulted in fewer direct loans to businesses, cities, and states than many anticipated when they were first announced, the Fed is likely to prefer an extension because they are a source of comfort for financial markets and the pandemic hasn't subsided.
Treasury Secretary Steven Mnuchin has committed $195 billion to backstop losses in several of the lending programs, but the Treasury last month indicated it supported allowing at least one of them, which provides short-term loans to cities and states, to lapse as scheduled at year-end. It is unclear if his approval, which is required to launch the program, is needed to extend the program.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
11-05-20 1503ET
