The U.S. Federal Reserve takes the patient approach: Leaves target rate range unchanged

December 12, 2019 Edward Golding

The U.S. Federal Reserve (Fed) announcement to hold its target rate range at 1.50  to

1.75%  was in line with market expectations. It was interesting to note that the Feds new projections indicate that they will keep rates at current levels until at least the end of

2020.  This was a dovish move by the Fed, giving market participants clear guidance that there will be at a minimum no hikes for at least a year. Furthermore, if economic data were to come in lower than current expectations, the Fed retains the ability to lower rates to support economic activity.

Labour markets remain strong, household spending is up

The announcement acknowledged the usual suspects. The U.S. labour market remains strong with a moderate increase in economic activity. Job gains continue as before and the unemployment remains low. As seen with the Bank of Canada's announcement on December 4th, U.S. household spending has also been rising at a strong pace while business fixed investment and exports remain weak. Overall inflation is sitting at below

2.0%  and expectations of long term change remain low.

The Fed maintained the rate as part of its mandate to foster maximum employment and price stability. As part of the decision, the Committee felt that the current policy will support the continued expansion of economic activity and keep inflation near its 2% objective. They, of course, will continue to monitor the situation and adjust as needed to maintain their objective.

Equity markets react positively, bonds and the U.S. dollar move lower

U.S. equity markets responded positively to the announcement with the S&P 500 moving higher after the December 11, 2:00 PM EST announcement. The U.S. dollar moved lower on the news from the Fed, while 10-year U.S. treasury bond  yields moved lower.

MD Financial Management's position aligned with U.S. Fed expectations

The Fed has signaled that it will continue to be supportive of economic activity and equity markets by keeping its key benchmark rate low for an extended period of time. We have been tactically positioned with an overall overweight to equities and an overweight to U.S. equities. The Fed's announcement should support equities and therefore our current positioning .

There was no surprise at this months announcement, but if you would like to learn more about interest rates announcements, how they can impact your investments or our current portfolio positioning, please reach out to your MD Advisor.*

* 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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