ng>The Pre-COVID Economy
As the coronavirus spread across the globe, the US economy was in its 128th month of expansion — the longest in our recorded history — and was generally in a strong position. Moderate growth continued at a slightly above-trend pace. Labor market conditions were strong across a range of measures. The unemployment rate was running at 50-year lows. PCE (personal consumption expenditures) inflation was running just below our 2 percent target.

The economy did face longer-term challenges, as all economies do. Labor force participation among people in their prime working years had been trending down since the turn of the millennium, and productivity gains during the expansion were disappointing. Income and wealth disparities had been growing for several decades. As the expansion continued its long run, however, productivity started to pick up, the labor market strengthened, and the benefits of growth began to be more widely shared. In particular, improved labor market conditions during the past few years encouraged more prime-age workers to rejoin or remain in the labor force. Meanwhile, real wage gains for all workers picked up, especially for those in lower paying jobs.

Most economic forecasters expected the expansion and its benefits to continue, and with good reason. There was no economy-threatening asset bubble to pop and no unsustainable boom to bust. While nonfinancial business leverage appeared to be elevated, leverage in the household sector was moderate. The banking system was strong, with robust levels of capital and liquidity. The COVID-19 recession was unusual in that it was not triggered by a buildup of financial or economic imbalances. Instead, the pandemic shock was essentially a case of a natural disaster hitting a healthy economy.

Given the condition of the economy, in the early stages of the crisis it seemed plausible that, with a rapid, forceful, and sustained policy response, many sectors of the economy would be able to bounce back strongly once the virus was under control. That response would need to come from actions across all levels of government, from health and fiscal authorities, and from the Federal Reserve.

It also seemed likely that the sectors most affected by the pandemic — those relying on extensive in-person contact— would face a long and difficult path to recovery. These sectors and people working in them would likely need targeted and sustained policy support.

Some asked what the Fed could do to address what was essentially a medical emergency. We identified three ways that our tools could help limit the economic damage from the pandemic: providing stability and relief during the acute phase of the crisis when much of the economy was shut down; vigorously supporting the expansion when it came; and doing what we could to limit longer-run damage to the productive capacity of the economy.

The Recession and Nascent Recovery
When it became clear in late February that the disease was spreading worldwide, financial markets were roiled by a global flight to cash. By the end of the month, many important markets were faltering, raising the threat of a financial crisis that could exacerbate the economic fallout of the pandemic. Widespread economic shutdowns began in March, and in the United States, with many sectors shut down or operating well below capacity, real GDP fell 31 percent in the second quarter on an annualized basis. Employers slashed payrolls by 22 million, with those on temporary layoff rising by 17 million. Broader measures of labor market conditions, such as labor force participation and those working part time for economic reasons, showed further damage.

In response, we deployed the full range of tools at our disposal, cutting rates to their effective lower bound; conducting unprecedented quantities of asset purchases; and establishing a range of emergency lending facilities to restore market function and support the flow of credit to households, businesses, and state and local governments. We also implemented targeted and temporary measures to allow banks to better support their customers.

The fiscal response was truly extraordinary. The unanimous passage of the CARES Act and three other bills passed with broad support in March and April established wide-ranging programs that are expected to provide roughly $3 trillion in economic support overall — by far the largest and most innovative fiscal response to an economic crisis since the Great Depression.