Fed minutes show concerns about severity of downturn

WASHINGTON — Federal Reserve officials last month expressed concerns about the severity of the economic downturn triggered by the coronavirus pandemic, saying the drop in economic activity in the spring would likely be the steepest in the post-World War II period.

The minutes of the June 9-10 discussions, which were made public Wednesday, show officials grappling with economic disruptions that had already occurred and noting the crisis was “not falling equally on all Americans.”

The minutes say that Fed officials discussed how the sharp rise in joblessness had been especially severe for lower-wage workers, women, African Americans, and Hispanics.

The Fed’s policy-making committee voted 10-0 at the June meeting to keep central bank’s benchmark interest rate at a record low near zero and officials expected that it would remain at that ultra-low level through 2022.

In an interview Wednesday with Fox Business Network, President Donald Trump, who was highly critical of Fed Chairman Jerome Powell for much of last year, said Powell has done a good job in dealing with the coronavirus.

“I would say I was not happy with him at the beginning, and I’m getting more and more happy with him. I think he stepped up to the plate. He’s done a good job,” Trump said. “I would say that, over the last period of six months, he’s really stepped up to the plate.”

Trump, however, declined to say whether he would nominate Powell for a second term as Fed chairman if he wins re-election. Powell’s current four-year term is up in 2022.

The minutes of the June discussions show that officials had received a briefing from the Fed staff on possible ways to enhance the Fed’s commitment to keeping rates low for an extended period. Those included the use of forward guidance in the policy statement and purchases of long-term bonds, both items the central bank is currently employing.

The Fed staff also briefed on a tool that the central bank has not used in seven decades: establishing caps on interest rates at certain maturity levels.

Under interest-rate caps, the Fed would purchase securities, such as three-year notes, to keep interest rates from rising above a certain limit. The central banks of Japan and Australia are currently employing that strategy.

However, the Fed minutes indicate little support for that approach, especially since rates are already so low. Several Fed officials indicated more support for possibly expanding the forward guidance language, possibly by tying future rate increases to specific economic outcomes, such as a rise in inflation or drop in unemployment.

“Whatever strategy the Fed ends up choosing, it is clear that interest rates will remain at near-zero for many years,” Andrew Hunter, senior U.S. economist at Capital Economics., wrote in a research note.

The minutes show that even before the recent spike in virus cases in Western and Southern states, Fed officials worried at their June meeting about what a resurgence of cases might do to efforts to mount an economic recovery.

“A number of participants judged that there was a substantial likelihood of additional waves of outbreaks, which in some scenarios, could result in further economic disruptions and possibly a protracted period of reduced economic activity,” the minutes say.

In recent public appearances, Fed Chairman Jerome Powell has stressed that the central bank plans to employ all of its tools to support a recovery from the current recession. He has also said that Congress, which has already approved record levels of support for laid-off workers and businesses, should consider doing more.

The Fed’s next meeting is July 28-29.

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Associated Press writer Darlene Superville contributed to this report.

Martin Crutsinger, The Associated Press