U.S. Federal Reserve leaves rates near zero as COVID-19 savages U.S. economy

The U.S. Federal Reserve, which has pumpedtrillions in emergency funding into U.S. financial markets tostem the damage from the coronavirus pandemic, left interest rates near zero andrepeated a vow to do what it takes to shore up the economy.

The central bank says the pandemic will "weigh heavily" onthe near-term outlook and poses "considerable risks" for themedium term.

"The Federal Reserve is committed to using its full range oftools to support the U.S. economy in this challenging time,thereby promoting its maximum employment and price stabilitygoals," the Fed said in a statement following a two-day policy meeting held via video conference.

Earlier Wednesday, the Commerce Department reported the economy contracted in the first quarter at its sharpestpace since the Great Recession, ending the longest economicexpansion in the nation's history.

That reflects a plunge in economicactivity in the last two weeks of March, which saw millions ofAmericans seeking unemployment benefits.

The rapid decline inGDP hasleft economists bracing for arecord slump in output in the second quarter.

"If the economy fell this hard in the first quarter, withless than a month of pandemic lockdown for most states, don'task how far it will crater in the second quarter, because it isgoing to be a complete disaster," said Chris Rupkey, chiefeconomist at Mitsubishi UFJ Financial Group in New York.

COVID-19 ends economy's longest expansion period

Plunging consumer spending on the back of widespreadstay-at-home orders to curb the spread of the virus helped drivea 4.8 per centdecline on an annualized basis in first-quarter grossdomestic product. The economy, which grew ata 2.1 per centrate in the fourth quarter, was in its 11th year ofexpansion, the longest onrecord.

An increasing number of U.S. states are reopening theireconomies or at least setting out plans for easing stay-at-homerestrictions, leading to fears there could be a resurgence ofinfections over the coming months and a headache for the Fed asit seeks to estimate the swiftness of the economic recovery.

With so much uncertainty around the economic outlook, theFederal Reserve said it expects to maintain the target range for itsbenchmark overnight lending rate "until it is confident that theeconomy has weathered recent events."

The statement reflects a sharp downgrade in theFed's assessment of the job market, household spending, energymarkets and the outlook for inflation since its last meeting inMarch, before most U.S. states had done much to curtail economicactivity and put the brakes on the exploding outbreak.

Last month, the Fed said only that it will keep rates nearzero "until it is confident that the economy has weatheredrecent events and is on track to achieve its maximum employmentand price stability goals."

It slashed rates to near-zero in March and rolled out a mixof new and refurbished crisis programs aimed at shoring upcredit markets and backstopping companies and local governmentsreeling from forced shutdowns and sharp drops in revenue.

Economy will rally, says Fed chair

Fed Chair Jerome Powellheld a news briefing following the meeting, andwarned the economy will decline at an "unprecedented rate"in the current quarter.

But Powell also said the economy will pick up as lockdown restrictions are lifted and vowed the central bank wouldcontinue to support the recovery.

"[The Fed has]really put themselves in the forefront oftrying to lead this recovery back," said Rick Meckler, partnerat Cherry Lane Investments in New Vernon, N.J. "They havebeen aggressive and probably are a big reason for some of thestrength the market has shown even in light of some reallynegative economic news."

The market did rally on Wednesday.U.S. stocks surged following drugmaker Gilead Sciences'announcement that itsdrug remdesivir is showing promise as a potentialCOVID-19treatment, giving a boost to the broader market and sending itsshares up 5.7 per cent.

The Dow and S&P 500 are both within 20 per centof their record levels, with thetech-heavy Nasdaq now within 10 per centof its high.

Meanwhile, the depth of the economic slowdown is starting to becomeclear, with more than 26 million people filing new claims forunemployment benefits since March 21. But the Fed and otheranalysts are still trying to get a handle on the likely shape ofthe recovery.

Most U.S. states still have stay-at-home measures, though ahandful are beginning to reopen even as cases of COVID-19, therespiratory illness that has killed more than 57,000 people inthe United States, continue to grow.

Many health experts have also begun to predict a seasonalresurgence of COVID-19 in the fall, whatever containmentmeasures are put in place, raising the possibility thatstay-at-home restrictions may need to be reintroduced, and withthem, a new downturn in economic growth.