Fed Sees Positive Signs for Economy in 2021 But Pins Hopes on Further Stimulus

The Federal Reserve plans to keep interest rates low for the foreseeable future, even if the economy recovers sooner than expected from the COVID-19 slump. The nation's central bank cut rates to 0 - 0.25% last March to boost consumer spending, which represents about two-thirds of the U.S. economy.

The decision to keep interest rates low is good news for homebuyers shopping for a low mortgage rate, but bad news for small savers who will earn little in passbook or money market accounts.

"The path of the economy will depend significantly on the course of the virus," the Federal Open Market Committee said in a statement. "The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term."

As of December 17, Johns Hopkins University said there were 247,403 new COVID-19 cases in the U.S., raising the total to 17,011,532. There have been 308,098 coronavirus-related deaths as of Thursday.

On Wednesday, the U.S. Commerce Department said purchases at stores, restaurants and online fell 1.1% in November on a seasonally adjusted basis from October. The number of first-time jobless claims totaled 885,000 for the week ending December 12, the biggest number since the week of September 5, the Labor Department reported Thursday. The number of new unemployment claims exceeded Wall Street's consensus estimate of 808,000.

The Federal Reserve expects the unemployment rate to decline to 6.7% this year, lower than the previously estimated 7.6%.

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Over half of the U.S.' biggest companies laid off workers during the pandemic. In this photo, Carlos Ponce joins demonstrators in a protest asking Senators to support the continuation of benefits for workers who lost their jobs on July 16, 2020 in Miami Springs, Florida. Joe Raedle/Getty

Earlier this month, the Labor Department reported an unemployment rate of 6.7%. That rate was 3.5% in February, the month before the pandemic hit. Unemployment peaked at 14.7% in April. The Fed believes the jobless rate will fall to 5% in 2021, down half a point from its prior estimate.

The Fed's outlook for a 2021 recovery pleased analysts.

"The Summary of Economic Projections was somewhat more positive than we expected in terms of growth, the labor market, and inflation," New York investment bank Goldman Sachs said in a research report.

The Fed said it plans to continue buying $80 billion in Treasury bills and $40 billion in mortgage bonds a month "until substantial further progress has been made" in reducing unemployment and reaching inflation goals.

"Together these measures will ensure that monetary policy will continue to deliver powerful support for the economy until the recovery is complete," Jerome Powell, chairman of the Federal Reserve, told reporters after Wednesday's meeting.

The Fed said weaker demand and lower oil prices have been "holding down" inflation. It expects inflation to remain below its 2% target through 2023.

At a press conference, Powell again called for additional fiscal stimulus to boost the economy.

"The case for fiscal policy right now is very, very strong, and I think that's widely understood right now," the Fed chairman said. "Now that we can kind of see the light at the end of the tunnel, it would be bad to see people losing their business, their life's work, even generations' worth of work."

Congress continues to discuss a $900 billion COVID-19 relief package that would include $600 direct payments to individuals, $300 billion for businesses and $300 added each week to state unemployment benefits.

Unless Congress passes a bill and President Donald Trump signs it into law, the government will shut down Saturday, with about 12 million people losing unemployment benefits on December 26.

Congressional leaders say they're close to a deal.