As most anticipated, the U.S. Federal Reserve (Fed) announced on Wednesday afternoon that it would keep the target for the federal funds rate at 0%-to-0.25%. If it wasn’t already clear, the Fed reiterated that it expects to maintain this level of monetary policy until its maximum employment and long-term 2% inflation target are sustainably achieved.
Additionally, the Fed will march forward with its quantitative easing program, ensuring smooth market function and supporting the flow of credit to households and businesses. The Fed will continue to increase its purchases of Treasuries (by at least US$80 billion per month) and agency mortgage-backed securities (by at least US$40 billion per month).
The path of the economy will depend significantly on the course of the virus
Not much has changed with regards to the Fed’s view on the pandemic – the “going public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”
“The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year… Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”
Chasing sustainable employment and inflation
The Fed will continue to use accommodative policy measures to support the U.S. economy to achieve its maximum employment and price stability goals (2% long-term inflation). The Fed is expected to keep interest rate policy as is until these goals are sustainably achieved.
Weaker demand resulting from the pandemic and the earlier decline in energy prices have been a drag on inflation. The Fed is aiming for higher inflation in the near term so that it averages 2% over time and longer-term inflation expectations remain anchored around 2%.
Positioned for low rates and a gradual recovery
The S&P 500 Index did trade modestly higher following the 2:00pm announcement (admittedly this probably has more to do with investors expecting U.S. policy makers to finally push through the next stimulus package). The U.S. dollar appreciated (vs. CAD) immediately following the announcement but returned to pre-announcement levels shortly after and 10-year U.S. bond yields moved slightly higher.
At this time, we maintain our view that interest rates will remain extraordinarily low for the foreseeable future. We expect global policy makers to continue with supportive measures until the recovery is well established.
As this announcement was broadly in line with our expectations, no material changes to our strategy are currently required. Our portfolios remain positioned for low interest rates, policy accommodation, normalized volatility, and recovering economic growth.
The next U.S. Federal Reserve interest rate announcement is expected in the new year on January 27th, 2021.
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.