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Fed holds the line on rates, asset buying

No one expected a shift in policy from the U.S. Federal Reserve (Fed) and this week’s announcement didn't surprise. With the trajectory of the U.S. economic recovery very much dependent on the uncertain nature of the pandemic, the Fed remains committed to holding interest rates near zero and continuing with its asset buying program. This decision was in-line with market expectations.

There are plenty of bright spots for the U.S. economy right now – the Fed pointed to strengthening economic and employment numbers and the quick pace of vaccination against COVID-19. But even with all the good news, the decision to keep the federal funds rate at 0-to-0.25% comes with the assertion that there is still room for improvement. The Fed said its accommodative stance will remain in place until employment numbers move up sustainably and its target of 2% inflation is reached and moderately exceeded.

The Fed also remains committed to its quantitative easing program, at least until it sees substantial progress in meeting its employment and price stability goals. It will continue to increase its holdings of treasuries and mortgage-backed securities by US$80 billion and US$40 billion per month, respectively.

Bottom line: The Fed announcement brings good economic news tempered with more of the same.

In terms of MD’s positioning, we continue to be overweight equities relative to bonds with the expectation that the Fed will remain committed to keeping rates near zero and getting the U.S. economy back to full strength. Inflation, when it appears, will be viewed as transitory to the Fed and equities will likely continue to benefit as a result.

If you have any questions or require more information, please contact your MD Advisor*.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.

About the Author

RICHARD SCHMIDT, CFA, est analyste principal en placement au sein de l’équipe Gestion multiactif chez Gestion financière MD. Il supervise les recherches et l’analyse pour tous les mandats d’actions et de titres à revenu fixe.

Profile Photo of Richard Schmidt