US GDP may drop 6.5pc in 2020

WASHINGTON: The US Federal Reserve yesterday signalled years of extraordinary support for an economy facing a torturous slog back from the coronavirus pandemic, with policymakers projecting a 6.5 per cent decline in gross domestic product (GDP) this year and a 9.3pc unemployment rate at year’s end.

In the first economic projections of the pandemic era, US central bank policymakers put into numbers what has been an emerging narrative: that the measures put in place to battle a health crisis will echo through the economy for years to come rather than be quickly reversed as commerce reopens.

The projections show the unemployment rate falling to 6.5pc at the end of 2021 and 5.5pc at the end of 2022 – a full two percentage points above where it was at the end of last year, representing millions of lost years of work.

“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 its latest policy statement.

The response: officials see the key overnight interest rate remaining near zero through at least 2022.

Officials also promised to maintain bond purchases at least at the current pace of around $80 billion per month in Treasuries and $40bn per month in agency and mortgage-backed securities – a sign the Fed is beginning to shape its long-run strategy for the economic recovery.

That recovery is expected to begin in earnest in 2021, with growth forecast at 5pc.

The pledge to keep monetary policy loose until the US economy is back on track repeats a promise made early in the central bank’s response to the coronavirus pandemic. That response included cutting its key overnight interest rate to near zero in March and making trillions of dollars in credit available to banks, financial firms, and a wide array of companies.

But the projections are the first issued since December, and offer policymakers’ views on how fast employment and economic growth might recover, and an initial steer on how long the federal funds rate will be pinned down.

Through most of last year US central bankers felt they were in an enviable spot, with record low unemployment, tame inflation, and a strong expectation that both would continue.

But the pandemic has now thrown them into what may be a years-long fight to bring Americans back to work after some 20 million jobs were lost from March through May.




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