Fed Projects 6.5% Economic Decline and Urges More Fiscal Support I Seattle Real Estate Podcast

At its June meeting, the Federal Reserve said it would keep the federal funds rate at near zero, doubling down on its commitment to help aid in the coronavirus-triggered economic downturn.Show more

In the short-term, the Fed projects a 6.5% decline in economic output in 2020, but expects to see growth again in 2021, citing the need for continued fiscal support from Congress to avoid long-lasting damage. For its part, the Fed recommitted to using its own tools to help aid in that recovery, such as increasing its purchase of Treasury securities and bonds and continuing its loan facilities.

Key takeaways:
- Federal fund rate remains unchanged at zero.
- Fed forecasts a 6.5% decline in GDP in 2020, but expects a 5% bounceback in 2021.
- Unemployment rate will end 2020 at 9.3% and decline to 5.5% by 2022, Fed says.

**What happened at the June 2020 Fed meeting**
Federal funds rate remains at 0% to 0.25%
For now, anyway, we shouldn’t expect any change to the rate until the Committee is “confident that the economy has weathered recent events,” according to its post-meeting statement, and is in a better place to meet the Fed’s goals of maximum employment and price stability.

As for when that might be, the Fed still sees the ongoing public health crisis as posing “considerable risks to the economic outlook over the medium term.”

The federal funds rate isn’t expected to get a boost until after 2022. In the June Fed dot plot — which indicates each member’s future prediction of the federal funds rate’s midpoint — all Committee members said they expected the federal funds rate to stay put through 2021. Two members were more hopeful for 2022, with one dot placing its range expectation at 0.25% to 0.50% and one dot placing an expectation at 1.00% to 1.25%. Beyond 2022, Fed members plotted an expected fed funds rate between 2% and 3%.

**Fed predicts a 6.5% decline in GDP in 2020**
It’s been six months since the Fed made its usual quarterly economic projections (it quickly ditched its March projections in the wake of the coronavirus pandemic). So all eyes were on this month’s meeting, in which Fed members projected a 6.5% drop in the country’s GDP, inflation at 0.8% and the unemployment rate to settle around 9.3% by the year’s end.

This, of course, paints a dramatically different picture than the Fed presented at the end of last year, when it predicted 2% growth in GDP, 1.9% inflation and 3.5% unemployment.

The decline in GDP in the second quarter alone is expected to be the worst on record, according to Fed Chair Jerome Powell.

Despite the troubling numbers, the Fed’s outlook provides at least some hope that the economy will recover meaningfully by the year’s end. Pre-pandemic, the unemployment rate averaged 3.6% for a year before skyrocketing to 14.7% in April and coming in at 13.3% in May.

The Fed stopped short of promising a complete turnaround in a given time frame, but said the unemployment rate will decline to 6.5% in 2021, 5.5% in 2022 and 4.1% in the longer run past 2022.

Powell concedes that this outlook may be hopeful, but that it is too early to say whether negative effects will be felt for years to come. He notes that we could see “better results sooner” if there were more fiscal support, but that it’s up to Congress to decide.

As for inflation, decreased demand for consumer goods and significantly lower oil prices have caused inflation to run well below the Fed’s target of 2%. The Fed expects it to climb closer to its goal in 2021 (at 1.60%) and 2022 (at 1.70%).

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