Fed Leaves Interest Rates Near Zero as Economic Recovery Slows

Federal Reserve officials left interest rates near zero on Wednesday and pledged to continue making huge bond purchases as the central bank tries to help the economy weather the continuing pandemic, warning that a surge in the coronavirus has slowed progress toward a full rebound.

“The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic,” the central bank’s policy-setting Federal Open Market Committee said in its January policy statement.

The Fed chair, Jerome H. Powell, said at a news conference on Wednesday that the virus resurgence was “weighing on economic activity and job creation,” and that the economic outlook hinged on the pandemic and “remains highly uncertain.”

Given that glum near-term assessment, Mr. Powell suggested that the bigger risk to the economy in coming months rested in doing too little rather than too much. He played down concerns that either an aggressive spending response from Congress or very low rates would cause runaway price inflation, and warned that allowing displaced workers to remain stuck on the job market’s sidelines could inflict lasting damage.

“I’m much more worried about falling short of a complete recovery and losing people’s careers, and the lives that they built, because they don’t get back to work on time,” Mr. Powell said. Such damage would be “not just to their lives but to the United States economy — the productive capacity of the economy.”

“I’m more concerned about that than the possibility, which exists, of higher inflation,” he continued. “Frankly, we’d welcome slightly higher inflation.”

Mr. Powell’s comments reinforced the Fed’s message that it will try to keep credit cheap for months or even years as long as it falls short of its two major goals, which are to foster maximum employment and price stability. Officials are hoping that by keeping interest rates low, they can boost demand in the economy and help set the stage for a job market recovery while also shoring up chronically weak inflation.

Besides leaving interest rates at rock bottom, where they have been since March, the Fed is buying about $120 billion in government-backed bonds each month to soothe markets and bolster the economy. Most investors expect the purchases to slow eventually, but Mr. Powell has been clear that officials are not yet anywhere near ready to set a date when they will taper off.

“It’s just too early to be talking about dates,” he said Wednesday. “When we see ourselves getting to that point, we’ll communicate clearly about it.”

Fed officials have repeatedly stressed that they are just one part of the economic response to this crisis, and that Congress — which has the power to spend and provide targeted relief — plays a central role.

As the recovery began to slow last year and lawmakers struggled to agree on another aid package, Mr. Powell and other Fed officials said publicly that additional stimulus was needed to help families and workers stay afloat and to prevent longer-term economic scarring.

In the postmeeting news conference, his first since lawmakers passed a $900 billion stimulus package in December, Mr. Powell demurred when asked whether the economy needed another round of fiscal support, saying the decision was up to Congress and the Biden administration. But he said a “key reason” for the strength of the economic recovery so far was a “strong and sustained” fiscal response from lawmakers.

“The path ahead is pretty uncertain,” he said, noting that small businesses are under pressure, among other needs.

“He didn’t say in any way, ‘Oh, they’ve done enough,’” said Julia Coronado, president and founder of MacroPolicy Perspectives, an economic consultancy. “I think there’s a whole mantra of the lesson learned is that you err on the side of doing too much.”

President Biden has proposed a $1.9 trillion stimulus package, but his administration must prepare the fine details and steer the legislation through Congress. That could be a challenge, as some Republican lawmakers revive concerns over the nation’s fast-growing debt and even some Democrats express concerns about another large package.

Democrats in Congress and the Biden administration signaled this week that they were preparing to move in the coming weeks to pass that fresh round of economic assistance, but probably not before former President Donald J. Trump’s Senate impeachment trial begins early next month.

Mr. Biden’s aides have been conducting meetings and listening sessions about his proposals with interest groups, governors, mayors, and Republicans and Democrats on Capitol Hill, Jen Psaki, the White House press secretary, told reporters on Wednesday.

Mr. Biden will hold a briefing on relief efforts with the new Treasury secretary, Janet L. Yellen, and other members of his economic team on Friday, Ms. Psaki said.

Mr. Powell said he expected to have a good working relationship with Ms. Yellen, who preceded him as Fed chair and will now become his most important partner in fighting the economic fallout from the virus. He has not met with her since her confirmation, he said, nor has he met with Mr. Biden.

While they have not talked, Mr. Powell echoed Mr. Biden’s view that mass vaccination was the key to getting the virus — and the economy — under control. Mr. Powell himself has had his first vaccination shot, he said, and expects his second soon.

Any change to the Fed’s policies may be on hold, but its efforts have played a continuing role in the economic rebound. Low rates have helped the economy avoid an even deeper slump, including by fueling a robust housing market. The Fed also rolled out a sweeping series of financial market rescue programs last year, several of which remain in place. Those helped keep credit flowing during the worst of the pandemic-related market turmoil.

Yet some analysts have warned that the Fed’s policies endanger financial stability as they push stock prices higher and cause investors to seek out ever-sketchier assets for better payouts.

“While there is for now no alternative to continued monetary policy support, there are legitimate concerns around excessive risk-taking and market exuberance,” International Monetary Fund officials warned in a blog post on Wednesday. “With investors betting on persistent policy backstop, a sense of complacency appears to be permeating markets.”

Mr. Powell, asked whether the Fed’s easy-money policies might fuel asset bubbles, said its actions had been necessary to get the economy out of an “unprecedented” shock. He argued that Fed interest rate policies were not a good first line of defense against frothy markets.

And he suggested that he did not see a huge bubble right now.

“Financial stability vulnerabilities over all are moderate,” Mr. Powell said — putting a yellow-light label on the concerns, one more concerned than “modest” but still not especially intense.

“The connection between low interest rates and asset values is probably something that’s not as tight as people think,” he added. “A lot of different factors are driving asset prices at any given time.”

Jim Tankersley contributed reporting.