‘The pandemic still provides considerable downside risks,’ Fed Chairman Powell says

The Federal Reserve kept its easy money policies in place, saying that business activity has softened with the resurgence of Covid-19 cases, but hoping the rollout of vaccines will tame the pandemic and heal the economy.

Until then, the Fed is trying to boost economic activity as much as it can.

The Fed last year cut short-term interest rates to near zero, launched a bond-purchase program worth $120 billion a month and said it would maintain these measures until its goals of lower unemployment and 2% inflation are achieved.

Low rates and bond buying are meant to support borrowing, spending and investment to support economic activity. For many businesses and households, cheap credit is the lifeline to pay bills until the economy returns to normal.

As coronavirus cases resurged in recent weeks, many states responded with new business shutdowns and restrictions. Employment and retail sales fell in December, and the number of Americans filing new claims for unemployment benefits has been rising since November. Though retail and restaurant activity has been soft, manufacturing has been firmer.

“Following a sharp rebound in economic activity last summer, the pace of the recovery has moderated in recent months, with the weakness concentrated in the sectors of the economy most adversely affected by the resurgence of the virus and by greater social distancing,” Fed Chairman Jerome Powell said at a press conference after a two-day meeting with other Fed officials.

The central bankers hope the setback is temporary and have signaled they have no intention of pulling back from their policies until the economy — and in particular the job market — recover. “There are people out there who have lost their jobs. It is essential that we get them back to work as quickly as possible,” Mr. Powell said.

Fed officials think the economy will bounce back later this year, as vaccines are more widely distributed and begin to bring the deadly coronavirus pandemic under control. That, in their estimation, would allow restaurants, hotels, airlines and other businesses to begin moving back toward operating at full capacity.

For now, the slow rollout of the vaccine has left Fed officials cautious about the outlook for the next few months. “We think it’s going to be a struggle,” Mr. Powell said. “The pandemic still provides considerable downside risks to the economy.”

The federal government has pumped trillions of dollars into the economy to keep it afloat. In addition to the Fed’s efforts to keep interest rates low, Congress has approved several rounds of spending and direct payments to households and businesses, with more likely on the way.

Congress and the White House in December approved $900 billion in new spending measures to address the pandemic and its economic effects, including sending $600 checks to many Americans. The money could pad household savings and lead to additional consumer spending.

The Biden administration has proposed $1.9 trillion in additional measures, including sending $1,400 checks to many households, though its legislative fate is uncertain.

Mr. Powell signaled tacit support for additional spending measures from Congress, saying they would “help households and businesses weather the downturn as well as limit lasting damage to the economy that could otherwise impede the recovery.”

After a hectic 2020 putting in place its policies, Fed officials are now watching to see the effects of these measures and whether their economic projections prove correct.

The central bank estimates U.S. economic output will grow 4.2% in 2021 and the unemployment rate will drop to 5% by year’s end from 6.7% in December. The Fed sees the jobless rate falling further to 4.2% by the end of 2022.

There is a risk that all of the money that Washington is pouring into the economy could lead to excessive inflation or some speculative financial bubble.

The effects of the Fed’s policies are already being felt in some sectors that are especially sensitive to borrowing costs, such as housing. Home prices in large metro areas were up 9.5% from a year earlier in November, according to the S&P CoreLogic Case-Shiller National Home Price Index. U.S. home sales in 2020 rose to their highest level in 14 years.

The borrowing rate on a 30-year fixed rate mortgage is around 2.75%, down from 3.6% a year ago, according to Freddie Mac, a large government-backed mortgage company.

Stock prices are also running higher, as are prices for some commodities, like copper and natural gas.

Brian Bethune, a Tufts University economics lecturer, said stocks looked a bit overvalued now but weren’t yet greatly overpriced.

Mr. Powell also played down the risk of a dangerous asset bubble. The home-price rise, for example, was in part a one-time event associated with the pandemic, he said. “There was a lot of pent up demand,” he added. “The price increases are unlikely to be sustained.”

Fed officials do expect consumer price inflation — for goods, like cars and clothing, and services, like haircuts and hospital care — to pick up in the months ahead, though they don’t expect that will be lasting either.

Consumer price inflation has run almost a half percentage point below the Fed’s 2% objective on average since it established that goal in 2012.

Mr. Powell said the Fed wants to see inflation run a little above that goal for some time to ensure it isn’t stuck below that target in the long run.

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com