Fed dashes hopes of a V-shaped rebound

The global stock market retreated yesterday after the US Federal Reserve said the American economy would shrink 6.5 percent in 2020 with a 9.3 percent unemployment rate at the end of the year - shooting down the notion of a V-shaped rebound.

The Fed also kept its benchmark short-term rates near zero.

"Twenty-two, 24 million people - somehow as a country, we have to get them back to work," chairman Jerome Powell said after the Fed's latest two-day policy meeting.

"They did not do anything wrong. This was a natural disaster."

He added: "We can use our tools to support the labor market and the economy and we can use them until we fully recover."

At this point "we are not even thinking about thinking about raising rates," Powell said.

The decision to leave the policy rate unchanged was unanimous. The central bank also began shaping the longer-term measures it will use to keep the recovery as strong as possible.

Officials promised to maintain ongoing Fed bond purchases at least at the current pace of around US$80 billion (HK$624 billion) per month in Treasuries and US$40 billion per month in agency and mortgage-backed securities - levels that may be increased later or supplemented with other strategies.

While growth may resume this year, policymaker forecasts show the rebound beginning in earnest in 2021, with economic growth for the year forecast at 5 percent.

Mohamed Aly El-Erian, chief economic adviser at Allianz, wrote in a Bloomberg column that "the Federal Reserve poured cold water on the notion that last week's surprise jobs report signaled a sharp V-shaped recovery" for the US economy."

"While consistent with many economists' expectations of a check-mark-shaped recovery, the Fed's economic projections are in sharp contrast to recent comments from the White House after last Friday's upside jobs surprise as well as some market participants' embrace of the notion of a V-shaped recovery.

"They highlight the challenges for economic activity when it comes to bouncing back from a virtually universal sudden stop as well as the risks of longer-term scare."

The Hong Kong Monetary Authority said it will continue to monitor market developments while maintaining monetary and financial stability, after selling a total of HK$48.1 billion since April.

In the US stock market, futures on the S&P 500 Index fell 2 percent as of 7.14 pm last night. In Europe, the pan-European STOXX 600 fell 2.5 percent, its fourth straight day of decline, as travel and leisure stocks slid 4.3 percent on fears of a further hit to demand.

In Hong Kong, the benchmark Hang Seng Index sank by 569.58 points, or 2.27 percent, to finish the session at 24,480.