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Maximum employment and 2% inflation: The Fed holds rates steady


Once again there were very few surprises with this week's announcement from the U.S. Federal Open Market Committee. After a two-day meeting, the Fed, as expected, left the target federal funds rate at 2.25% to 2.50%. The Fed said they will be taking a more patient approach to future rate hikes—Current forecasts indicate no rate hikes in 2019 and one rate hike in 2020.

Solid labour markets and slowing economic conditions

The Fed noted a strong labour market, solid job gains and low unemployment. The forecast for 2019 unemployment increased to 3.7% from 3.5% in December and to 3.8% from 3.6% for 2020.

Economic activity has also slowed. Projections for 2019 real GDP growth were reduced to 2.1% from 2.3% and 2020 real GDP growth to 1.9% from 2.0%. In addition, recent indicators point to slower growth of household spending and business fixed investment.

Overall inflation has declined due to lower energy prices on a 12-month basis. Core inflation expectations for 2019 and 2020 were not changed and remain at 2.0%.

Maximum employment and 2% inflation

The decision to keep rates unchanged supports the Fed's goal of maximum employment and price stability and they project that current conditions will meet the Committee's inflation target of 2%. As for future rate changes, the Fed will continue to assess various indicators such as labour market conditions, inflationary pressures, financial markets and international developments.

Following the announcement on Wednesday afternoon, we saw the S&P 500 rally before forfeiting most of those gains to close the day. Additionally, we saw both the U.S. dollar and 10-year U.S. treasury bond yields drop.

Wednesday's announcement will not change the way we manage MD funds and pools. We don't expect any significant impact outside the likely boost to equity markets.

For more information about the announcement and how it may affect your portfolio, please contact your MD Advisor.

About the Author

Edward Golding, CFA, MBA, was 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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