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U.S. Federal Reserve holds near zero: Ongoing health crisis still a risk

Unsurprisingly, the U.S. Federal Reserved (Fed) decided to maintain its federal funds target rate range at 0.0-to-0.25% on Wednesday afternoon.

The Fed believes the path to economic recovery is highly dependent on how the pandemic continues to unfold as the U.S. continues to struggle to contain new COVID-19 cases. “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

Improving conditions

We’ve seen the pandemic cause tremendous human and economic hardship across the U.S. and the world. Following the sharp decline we experienced earlier in the year, economic activity has picked up in recent months. However, both economic activity and employment are well below the levels seen prior to the outbreak. Overall, financial conditions are much improved, reflecting the significant policy measures enacted to support the economy, households and businesses. 

Maintaining market confidence

Along with the announcement, the Fed noted that it expects to maintain its target rate range until it is fully confident that the economy has “weathered recent events and is on track to achieve its maximum employment and price stability goals.” It once again added that it is committed to using its full range of tools to continue to support the U.S. economy at this time.

To do this, the Fed will increase its asset holdings (Treasuries, agency residential and commercial mortgage-backed securities) at least at its current pace to ensure smooth market operations. In addition, overnight and term repurchase agreement operations will continue.

Furthermore, temporary U.S. dollar liquidity swap lines and temporary repurchase agreement facilities for foreign and international monetary authorities (designed to reduce strain on the supply of credit to households and businesses in the U.S. and abroad) will be extended to March 31, 2021.

The Fed will also extend emergency measures it has already launched through March 2021.

Staying ready to act

Given that the announcement and its details were widely expected, the S&P 500 moved marginally higher while the U.S. dollar and the 10-Year U.S. Treasury yield were little changed. At this time, there will not be any material changes to our strategy.

Much like the Fed, we will continue to monitor the implications of incoming information – economic data (labour markets, inflation, other financial metrics), public health data, global developments – and will stay ready to respond appropriately.

For more information, please do not hesitate to 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.