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Jerome Powell testifies before Congress in June. (Photo: Tasos Katopodis/Pool/ AFP via Getty Images)

The Federal Reserve said Wednesday that the economy will shrink by 3.7% this year — a rosier outlook than the 6.5% contraction initially projected in June.

Why it matters: The economy is still wrecked by the coronavirus pandemic, but has rebounded faster than some anticipated. Signs still suggest the recovery could stall out. The August unemployment rate is already lower than where the Fed, in June, said it would be by year-end.

  • The Fed's fresh outlook sees the unemployment rate at 7.6%, lower than the 9.6% it saw three months ago.
  • "For the last 60 days or so, the economy has recovered faster than expected. That may continue or not, we just don’t know," Fed chair Jerome Powell said in a news conference Wednesday.

Between the lines: The projections came alongside the Fed's closely watched policy statement, which said it expects to keep interest rates near zero until the labor market improves. It also said the Fed won't move on rates until inflation rises to 2% and is on track to "moderately exceed" that level for a period of time.

Of note: Two Fed officials dissented against the statement.

  • Dallas Fed President Robert Kaplan wants the central bank to be more flexible with its interest rate setting path after the economy recovers and prices rise.
  • Minneapolis Fed President Neel Kashkari says the Fed should indicate that it won't move on interest rates until inflation reaches 2% "on a sustained basis."

Catch up quick: The Fed said last month it's willing to allow prices to rise above its longtime 2% target for a period without raising rates to head it off.

  • It was a massive shift in its inflation strategy. What it didn't specify was how long it'd be willing to let inflation drift higher — or how high it could go before the Fed was tempted to pump the brakes on the economy.
  • "We're resisting the urge to create a rule or formula here," Powell said.

What they're saying: Powell said more fiscal support will "likely be needed." He added that both the Fed and private economic forecasters have another stimulus package baked into their forecasts. It's just a matter of "when and how much and what will be the contents," Powell said of expected action by Congress.

  • Democrats and Republicans are deadlocked on negotiations for a stimulus deal.
  • Powell laid out the worst case scenario if no additional stimulus comes: The unemployed will be unable to find work in sectors hit by the pandemic, which will show up in economic activity, evictions and foreclosures. These are "[t]hings that will scar the economy," Powell said.

What to watch: Powell indicated that the Fed will "be making some changes," to make its Main Street Lending Program more "broadly available."

  • The Fed swept in when the pandemic started to throttle the economy with its own economic support programs, but some have so far fallen flat.
  • The Main Street Lending Program has distributed just 117 loans as of Sept. 2. In the meantime, only two entities have taken advantage of the Fed's municipal lending facility.

Go deeper

Dion Rabouin, author of Markets
Dec 21, 2020 - Economy & Business

The world's dual realities could harden in 2021

Illustration: Sarah Grillo/Axios

Heading into 2021, the economy is in a state of gross divergence, presenting opposing narratives that are drifting further apart, creating ostensible winners' and losers' brackets.

Why it matters: The pandemic has accelerated shifts in the economic makeup of the U.S. and the world. Those trends are being further cemented.

8 mins ago - Technology

The future of music is (still) vinyl

Illustration: Sarah Grillo/Axios

Vinyl record sales are rising — and it's younger music enthusiasts who are driving the trend.

The big picture: Even though streaming services dominate music consumption, vinyl hasn't gone the way of CDs.

Felix Salmon, author of Capital
Updated 23 mins ago - Economy & Business

America fought the pandemic economy — and won

Illustration: Sarah Grillo/Axios

The U.S. economy is emerging from the pandemic with more well-paying jobs for those who want them, less hunger, less poverty, higher wages, less inequality, and more wealth for everyday Americans.

Why it matters: None of these outcomes were expected when the pandemic began. All of them are the result of massive government programs.