The Federal Reserve on Wednesday projected that the U.S. economy will contract by 6.5 percent this year, a grim outlook that could even prove optimistic if there is another coronavirus outbreak.
Fed policymakers — who signaled they intend to hold interest rates to near zero through at least 2022 — forecast that the unemployment rate will only drop to 9.3 percent by the end of 2020, down from 13.3 percent in May, a number that the Labor Department itself has said understates current joblessness.
The central bank’s predictions underscore the daunting task that President Donald Trump faces in trying to bring the country out of recession as he fights for reelection. As recently as February, just before the lockdowns began, the president was touting an unemployment rate of 3.5 percent, its lowest reading since the 1960s.
“This is the biggest economic shock, in the U.S. and in the world, really, in living memory,” Fed Chair Jerome Powell said at a press conference after central bank officials met in Washington. ”We went from the lowest level of unemployment in 50 years to the highest level in close to 90 years, and we did it in two months.”
Incumbent presidents are historically unlikely to be reelected when the economy is in dire straits, putting pressure on Trump to ensure a quick rebound. But the circumstances of the recession — a broad economic shutdown to stop the spread of a pandemic — could soften voter views of the president, who has consistently polled well on economic matters even as he lags behind Democratic rival Joe Biden overall.
Powell, whose Fed has poured trillions of dollars in credit into the economy, praised the federal government’s response to the economic meltdown and suggested that the White House and Congress could still do more to speed up the recovery.
“If there were more fiscal support, you’d see better results sooner,” he said. “But that’s a question for Congress.”
The Fed’s forecast is not even the most pessimistic one out there: The Congressional Budget Office expects unemployment to average 9.3 percent next year, while the central bank sees the jobless rate falling to 6.5 percent by the end of 2021.
Powell said Fed officials expect the economy to begin recovering in the second half of the year, but emphasized that putting all of the millions of Americans displaced by the virus back to work will be a “long road.”
He also said the decline in GDP in the quarter ending in June “is likely to be the most severe on record.”
According to the Fed’s forecasts, the U.S. economy will grow at 5 percent next year and 3.5 percent the year after.
The central bank signaled that it expects to keep an extraordinary level of support for the economy in place for years, including maintaining rock-bottom interest rates until the end of 2022 at least.
Central bank officials also indicated that they believe unemployment will one day fall to as low as 4 percent, though it will take longer than the next couple of years to reach that point.
“We just had a period of unemployment that was well below 4 percent,” Powell said. “During that time we saw a lot of great things happening in the labor market, things we’d love to get back to.”
“We’re not thinking about raising rates,” he added. “We’re not even thinking about thinking about raising rates.”