US economy will shrink 6.5% this year, Fed forecasts | Business

US economy will shrink 6.5% this year, Fed forecasts | Business

The US economy will shrink by 6.5% this year, the Federal Reserve has forecast, announcing it would keep interest rates close to zero into 2022.

The US central bank’s moves come as the economy struggles with the impact of the coronavirus pandemic. However, the Fed expects the US economy will return to growth in 2021, with unemployment falling to 9.3% and GDP increasing 5%, followed by 3.5% growth in 2022.

“The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term,” it said in a statement.

The Fed cut interest rates to near zero in March when the global coronavirus pandemic reached US shores, and the Fed has since purchased more than $2tn in treasury and mortgage securities to ensure smooth market functioning.

Stock markets have swung back from big losses at the start of the outbreak as investors bet on a swift “V”-shaped recovery. They have also been driven higher by the tech sector’s dominance of US indices.

Tech has been the clearest winner during the pandemic, and share prices in companies including Apple, Amazon, Facebook and Microsoft have all recently hit all-time highs.

US stock markets, which have dipped in recent days, bounced back after the Fed statement on Wednesday.

The Fed also predicted that the sharp rise in unemployment, which has shot up since the pandemic closed down much of the US, would soon start to recede, falling to 5.5% by 2022.

The US jobs market – while still reeling from the coronavirus pandemic – appears to be over the worse.

Last week the labor department announced unemployment had fallen to 13.3% in May from 14.7% in April, as some people returned to work. But the rate is still the highest it has been since the 1940s, and the labor department said that difficulties collecting data during the pandemic meant the figure was likely 3% higher.

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