Fed Chairman Jerome Powell. (Photo: AP) Fed Chairman Jerome Powell. (Photo: AP)

The Federal Reserve reaffirmed Wednesday that it would do whatever was necessary to support an extremely weak economy suffering from the impact of the COVID-19 pandemic.

Just hours after the government reported first-quarter GDP falling 4.8% on an annualized basis — the biggest drop since 2008 — the Fed said it was “committed to using its full range of tools to support the U.S. economy in this challenging time.”

The Fed said it would maintain interest rates near zero — in the 0-0.25% range — “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

The central bank also said it “will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning” and would “continue to offer large-scale overnight and term repurchase agreement operations,” all along closely monitoring market conditions and making adjustments “as appropriate.”

Major stock market indexes, which had been rallying for much of the day, retreated slightly after the Fed’s statement was released, then inched higher. At market close, the Dow was up 2.2%; the S&P 500, 3.1%; and the Nasdaq up 3.5%.

Treasury yields across most of the curve were mostly unchanged, near recent record lows.

The market shrug is not surprising since the Fed essentially just repeated its commitment to use “all its tools aggressively to restore the economy,” according to Jeff Kleintop, chief global investment strategist at Charles Schwab. “The fact that the Fed didn’t announce anything new may be a sign that they feel their programs targeting corporate debt and short-term funding have been working rather than that they believe they are out of ammunition.”

Jason Pride, chief investment officer of Private Wealth at Glenmede, said “The main message from the statement is that zero interest rates are here to stay for as long as the economy needs the support … There is no way around it — the economic impact will be ugly in the the short term.” 

The Fed agrees. It noted in its statement that “the coronavirus outbreak is causing tremendous human and economic hardship across the United States and around the world. … 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.”

In his press conference following the Fed’s policy statement, Fed Chairman Jerome Powell said “the depth and duration of the economic downturn are extraordinarily uncertain” and will depend on getting the coronavirus under control.

He affirmed the commitment to continue to “use forceful” measures “proactively and aggressively” until the central bank is “confident that we solidly on the road to recovery.”

Asked by a reporter in the Q&A that followed whether more was needed to support the economy, Powell responded that despite aggressive action by the Fed and Congress, which had “reacted quite aggressively and strongly with CARES Act and other laws,” the economy may “need more support from all of us” if the economic recovery “is to be a robust one.”

Policies that protect workers, businesses and households from avoidable insolvency are going to be key, said Powell, adding they will come with a “hefty price tag” but will lead ultimately to a “stronger economy and less long-run damage.”

Asked about the Fed’s credit facilities to support markets and lending to businesses and individuals, Powell said the Fed could do more on that front and would continue its quantitative easing program to purchase Treasurys, agency debt and mortgage-backed seçurities in the amount “needed to support smooth market function.” The Fed had reduced some of those purchases recently and is not about to change them now, according to Powell, who noted that the Fed was waiting “to see more.”

He said the Main Street lending facility that the Fed announced previously was still in development and its corporate credit facilities were “near being finalized” and would be operating “fairly soon.”

Powell repeated a statement he’s made previously, that the Fed’s programs are lending programs, not grants, which, under the law, the central bank cannot offer. Neither can it legally lend to insolvent companies, said Powell. “We will do what we can do to the absolute limit of those powers.”

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