Fed acknowledges medium-term risks to economy from Covid-19 crisis

Americans can rest assured that the Federal Reserve will do its utmost to maintain loose monetary policy until the economy is firmly on the path to recovery, US rate-setters said.

Following two days of deliberations, policymakers on the Federal Open Market Committee, the monetary authority's top decision-making body, acknowledged in their policy statement that the Covid-19 coronavirus poses "considerable risks to the outlook over the medium-term".

Fed chairman Jerome Powell went even further in his post-meeting webcast, saying: "I would say that it may well be the case that the economy will need more support from all of us if the recovery is to be a robust one."

Yet as Ian Shepherdson, chief economist at Pantheon Macroeconomics noted "we don’t know anyone who thinks that the massive shortfall in aggregate demand created over the past six weeks will be fully recovered anytime soon."

"Nothing done, because everything already has been done," Shepherdson added in a research note sent to clients.

The above remarks from the policy statement issued by the FOMC after Wednesday's meeting appeared to imply that - at least at present - policymakers would start to tighten policy before their dual employment and inflation mandate had been met.

But as Shepherdson noted, "we see no tightening, either via higher rates of QT, until 2022.

"We agree with the FOMC that the virus hit is a disinflationary shock, but we acknowledge the risk that a return to full employment, with the Fed still holding its current stance of extreme accommodation, could prove an inflation risk, eventually.

"But this is an idea for the future, not now. For now, the Fed pledges in effect to do whatever it takes to keep all markets liquid. That’s the right call, and the certainty it provides to markets means that the Fed ultimately will have to *do* less."