The U.S. Federal Reserve will hold rates until it’s confident the economy has weathered the storm

April 30, 2020 Edward Golding

As widely expected, the U.S. Federal Reserve (Fed) decided to maintain its federal funds target rate range at 0.0-to-0.25%. Also, in line with expectations, the Fed did not announce any major changes to recent policy decisions – it remains fully committed to using its range of tools to support the U.S. economy during the COVID-19 pandemic.

The ongoing health crisis continues to weigh on economic activity

The viral outbreak has caused tremendous human and economic hardship across the U.S. and around the world. The virus and the measures taken to contain its spread have cut deeply into economic activity and employment in the near-term and poses significant risks to the medium-term outlook. We’ve seen U.S. gross domestic product turn negative for the first time since 2014.

Amid the COVID-19 induced crisis, the Fed had already cut rates to the lower bound and started repurchasing assets via its most recent round of quantitative easing back on March 15th to support markets.

The Fed is expected to hold interest rates at current levels until clear signs that the U.S. economy has weathered the storm surfaces and that it is on track to achieve its maximum employment and inflation goals. As mentioned earlier, the Fed will use all of its tools to support the economy based on incoming economic information, public health conditions, and global developments.

Quantitative easing to continue

The Fed also confirmed that it would continue to purchase treasuries and mortgage back securities to facilitate smooth market operations. In addition to adding over US$2 trillion in assets over the past few weeks, the Fed also started purchasing investment grade and high yield corporate bonds (directly and via exchange traded funds).

For more information about quantitative easing – what it is, how it works, and why it is so important during the COVID-19 pandemic – please listen to latest episode of the MD Market Watch Podcast, where I discuss this and more.

Continuous assessment and ready to act

As the announcement was widely aligned with our expectations, we do not anticipate any material changes to our strategy as a result of the Fed’s statement. We believe we are appropriately positioned at this time. 

Following the Fed’s announcement, U.S. equities initially declined, but resumed its upward trend for the day shortly after. The U.S. dollar weakened relative to other major currencies and 10-Year U.S. Treasuries moved higher for the day.

Much like the Fed, we will continue to monitor market conditions and we are prepared to adjust our plans if needed.

If you have questions about the Fed’s interest rate decision or about your portfolio, please contact your MD Advisor*. She or he would be happy to provide assistance.

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

About the Author

Edward Golding

Edward Golding, CFA, MBA, is an Assistant Vice President with the Multi-Asset Management team at MD Financial Management. He oversees the Canadian, Dividend and U.S. equity mutual funds and investment pools at the firm.

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