WASHINGTON (AFP) – The Federal Reserve will meet next week for the first time since states in the United States (US) began easing shutdowns imposed to stop the coronavirus pandemic, unexpectedly boosting employment numbers after two months of massive layoffs.
The world’s largest economy added 2.5 million jobs and the unemployment rate fell in May, according to the Labour Department, even as COVID-19 remains a threat to daily life.
The Fed moved swiftly and aggressively as soon as the pandemic struck, even before businesses were shut down nationwide, as the policy-setting Federal Open Market Committee (FOMC) slashed its key lending rate to zero in March.
The central bank also rolled out trillions of dollars in liquidity to support battered markets, and provide lending to large and medium businesses as well as state and local governments.
And Fed chair Jerome Powell has vowed to do more, if necessary.
US President Donald Trump who is counting on a solid economic recovery to boost his chances of winning a second term in November, cheered the better-than-expected job numbers.
But despite the unexpected good news the economy remains in trouble and BBVA’s chief US economist Nathaniel Karp does not expect the FOMC to waver from its stance any time soon.
“While there are some early signs that the worst part of the crisis has passed, we expect that the Fed will reaffirm its commitment to doing whatever it takes while also reflecting on how the committee is viewing the current crisis,” he said.
The virus itself remains a real threat, with cases continuing to climb in the US, home to the world’s worst outbreak with more than 108,000 dead – meaning life and commerce are not yet back to normal.
Powell has warned of the dire state of the US economy, and said economic data in the April-June quarter “will be very, very bad” – potentially falling 20 to 30 per cent.
“There will be a big decline in economic activity, big increase in unemployment,” he said in a CBS interview last month.
While economists were expecting the Labour Department’s jobs report for May to show the unemployment rate rising to around 20 per cent from its already horrific level of 14.7 per cent in April, instead it declined to a still-awful 13.3 per cent as the economy added jobs when states began restarting economic activity.
But Kathy Bostjancic of Oxford Economics said the central bank is unlikely to read too deeply into the positive employment data.
“While welcomed by Fed officials, the jobs report won’t change the outcome of the upcoming FOMC meeting,” Bostjancic said.
“The policy rate will remain pegged near zero until the recovery is firmly in place, open-ended and flexible (bond purchases) will continue, and the Fed will stand ready to lend via its emergency facilities,” she said.
The FOMC skipped its quarterly forecast in March amid the chaos of the early days of the pandemic, but is scheduled to produce the Summary of Economic Projections (SEP) at this meeting.
Bostjancic said the bank will likely predict a strong GDP rebound in the second half of the year, with the caveat that it will come off the depressed activity of the second quarter.
Another factor are the nationwide protests against racism and police violence after the killing of George Floyd at the hands of police in Minneapolis, in addition to the continued possibility there will be renewed outbreaks of coronavirus.