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Updated: April 29, 2020

The Fed slashed rates to zero and lent billions of dollars. Its next step is complicated

The Federal Reserve slashed interest rates to zero and committed to a large-scale asset buying programs to help the economy through the coronavirus shock. Now the attention turns to the future, as economists and investors await word on where the Fed expects the economy is headed.

When it slashed interest rates to zero in March, the Fed didn't provide much of a road map beyond acknowledging an expected severe economic disruption. Since then, 26.5 million people filed for initial unemployment benefits, consumer confidence fell to a six-year low and retail sales dropped to the lowest level on record.

The advance reading of first-quarter US GDP growth will be released Wednesday morning ahead of the Fed's update. Economists predict the economy contracted at a 4% annualized rate -- its worst performance in eleven years.

Since the Fed last took action, enough economic data has been released to illustrate just how bad the coronavirus shock is for the US economy. But it fares through the summer and what the recovery looks like remain big question marks.

That's why economists and market participants parse every word in Fed Chairman Jerome Powell's Wednesday's statement.

The central bank will deliver its policy decision at 2 pm ET on Wednesday, followed by a press conference at 2:30 pm ET.

"Jay Powell is going to say two things. One being that the Fed believes that it has done enough and the other being that it could do more if needed to," said Vincent Reinhart, chief economist BNY Mellon. The Fed's tool box is not unlimited, but Powell will likely want to soothe worries about whether the central bank has used up its entire arsenal.

Besides cutting interest rates to zero, the central bank unleashed billions of dollars to provide liquidity for various lending markets. But the emergency measures are still so new that their benefits might take some time to show up in the data.

In the meantime, the Fed could extend the lifespan of some of the measures it took. On Monday, it expanded the term and scope of its Municipal Liquidity Facility, which lends up to $500 billion to states and municipalities. It will buy debt from smaller cities, and the MLF will now run until December, rather than September as initially intended.

"During a time of shock you want policy to be timely and temporary. It was certainly timely," Reinhart said. "As for temporary, we don't know what that means yet."

Some also believe Powell will commit to lower interest rates for longer. But Powell and other Fed officials have spoken out against negative interest rates.

Don't expect too many specifics about when the economy will bounce back. UBS economists don't expect that sort of guidance from the central bank until after its June meeting, when another quarter's worth of data might provide answers on the state of the economy -- and when it might be reopened.

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