The Federal Reserve offered a mid-year update on the economy, after skipping the last update in March due to the pandemic. After a two-day meeting, Fed Chief Jerome Powell delivered his comments in a virtual meeting with reporters. He highlighted the fact that we are in the midst of a difficult and challenging time with great uncertainty about the future. But that said, he offered a potential timeline for a recovery that could make us economically whole over the next couple of years.
Zero Interest Rate for Next Few Years
The Federal Reserve had cut its benchmark lending rate to zero in mid-March in response to the health crisis and the impact it is having on economic activity, employment, and inflation. Powell said, “The Committee expects to maintain this target 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.” Powell said, “We’re not even thinking about raising rates.” (1)
Committee members foresee the timeline for the recovery extending through next year. There was no talk about negative rates.
Because of the uncertainty, Powell characterized this economic projection as “unofficial.” He said much depends on the path of the virus. In this unofficial view, the Fed sees a -6.5% GDP for 2020 and a rebound to (positive) 5% next year. The projection continues with a 3.5% GDP in 2022 and 1.8% in 2023. (2)
Getting People Back to Work
As for jobs, the Fed is anticipating that the jobless rate will hit 9.3% by the end of the year. That’s still a lot of unemployed people, but we’re currently at about 16.3% or 13.3% depending on which numbers you include in the result. The government had reported a stunning drop in unemployment on Friday, June 5th to just 13.3% but later said that that was about 3 percentage points less than what it should be because of the way people answered questions on the survey. Many apparently felt that they still had jobs, but wrote down that they are currently absent from their jobs.
The unemployment forecast continues decreasing to 6.5% next year, 5.5% in 2022, and maybe 4.1% in 2023.
The Fed is keeping a close eye on inflation and expects it will rise to .8% by the end of year and hit the 2% level by 2023. Core inflation, which eliminates gas and food, would be similar at 1% by the end of this year and 1.7% in 2022.
Fed Commitment to Stabilize the Economy
Powell said, “The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.” That includes a flow of credit to businesses and households. The Fed implemented a $700 billion quantitative easing program in March, when it reduced the interest rate to zero. (3) The Fed said it will continue the purchase of Treasury and mortgage-backed securities at a reduced rate. The Fed’s balance sheet is currently at $7 trillion.
The pandemic has caused an unprecedented shock to the economy. We went from the lowest unemployment in 50 years to the highest, in just two short months. The outbreak shut down 95% of the economy, and put some 20 million people out of work. The GDP fell about 5% in the first quarter, and economists predict it will have declined 50% in the second quarter. But most economists also believe that this contraction is currently ending with the reopening of the economy.
Just a few days ago, the National Bureau of Economic Research declared that the U.S. entered a recession in February. And now economists believe we are already exiting the recession, making it the deepest, and the shortest. That’s after the longest economic expansion in post-World War II history. It lasted 128-months or almost 11 years.
The NBER said in a statement, “It concluded that the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.”
Recessions are usually defined as two consecutive quarters of negative GDP growth, but the NBER has some leeway in making that determination.
However, not all economic recessions affect real estate. It really comes down to supply and demand. Currently, with so many people staying put, and many renters wanting to move out of apartments in to single family rentals with yards and more privacy, we’ve actually seen stabilized home prices, normal rent collections, and increased applications for rentals. The value of a home, whether renting or owning it, has actually elevated during this particular recession, as more people are working from home, teaching at home, cooking at home, and generally “safer at home.”
(2) CNBC Report