The Fed admits the economy has slowed, but it’s banking on vaccines to undo damage

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The U.S. economy has taken a turn for the worse after a winter surge in coronavirus cases, the Federal Reserve admits, but it’s doesn’t think any more monetary medicine is needed right now.

Betting on a stronger rebound later in the year, the central bank on Wednesday stood pat at its first policymaking meeting of 2021 and took no other steps to help the economy.

The Fed is already doing a yeoman’s job to grease the wheels of economic growth via a multi-pronged strategy to keep interest rates at modern record lows. That’s led to a record stock market, the biggest boom in home sales in 14 years, and robust sales of new cars, among other things.

Adding to the effort, Washington approved another $900 billion in federal aid in the waning days of the Trump administration and new President Joe Biden is promising potentially trillions more in relief for the economy.

The fresh damage to economy from the coronavirus pandemic, meanwhile, has not been quite as bad as feared. Individuals and businesses have shown greater resilience and more adaptability, Fed Chairman Jerome Powell noted Wednesday, and kept the economy plowing ahead.

The government on Thursday is likely to report the economy expanded at 4%-plus annual pace in the final three months of 2020 — and some expect gross domestic product to top 5%. That would be no small achievement given an increase in layoffs, declining employment and drop in retail sales at the end of the year.

Before the Fed considers further monetary support, Powell said the central bank wants to gauge the effectiveness of the coronavirus vaccines and whether they stamp out the pandemic. Powell himself has gotten his first shot and will soon get a second.

“There is nothing more important now to the economy than people getting vaccinated,” he said.

Although Powell offered the usual caveats about the “highly uncertain” nature of the pandemic and its effects on the economy, he repeatedly signaled the latest weakness is likely to prove temporary as vaccines become more widely distributed and coronavirus cases continue to fall.

Referring to the 400,000 decline in employment in December at bars and restaurants, Powell noted “that’s all because of the spread of the pandemic.” Left unsaid was the assumption that most if not all of those jobs will return as the pandemic fades.

“The economy is continuing to play a vigorous tug-of-war between virus case rates and variants on one side and vaccines in arms on the other side, but the Fed is reckoning that the latter will win,” said Michael Gregory, deputy chief economist at BMO Capital Markets.

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