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Cautious U.S. Federal Reserve holds rates near zero

Federal reserve signature at the bottom af American paper money.

As most expected, a dovish U.S. Federal Reserve (Fed) decided to maintain its federal funds target rate range at 0.0-to-0.25%. Furthermore, the Fed stated that it “expects to maintain this target range until it is confident that the (U.S.) economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Also, in line with expectations, the Fed confirmed that it remains fully committed to using its range of tools in order to continue to provide support to households, businesses, and the broader economy.

Keeping rates low

The Fed expects to keep rates at current levels until at least the end of 2022. Fed committee members do not expect a rate increase over the short term and negative rates are not an option at this time.

Similar to the statement made in April, the Fed confirmed that the pandemic has caused tremendous human and economic hardship across the U.S. and the globe. The virus and the measures taken to contain its spread have caused a sharp decline in economic activity and a surge in unemployment.

Although financial conditions have improved and employment has been better than expected, the ongoing health crisis will continue to weigh heavily on economic activity, employment, and inflation in the near term, and still poses a considerable risk to the economic outlook over the medium term.

The Fed appears optimistic with regards to GDP projections, expecting a decline of 6.5% in 2020, a gain of 5.0% for 2021, followed by a 3.5% gain in 2022, with the gains in 2021 and 2022 being well above the economy’s long-term trend. It’s important to note that there appears to be a wide range of expectations for GDP, highlighting the uncertainty clouding the current environment.

The Fed will continue to support the economy

In order to continue to support the flow of credit to households and businesses, the Fed will continue to purchase treasury securities (approximately US$80 billion per month) and agency residential and commercial mortgage-backed securities (approximately US$40 billion per month) at least at its current pace. In addition, it will continue to offer large-scale overnight and term repurchase agreement operations.

It’s also interesting to note that the Fed’s balance sheet has ballooned to over US$7.2 trillion. In the press conference following the Fed’s announcement, Chairman Jerome Powell indicated that he was not concerned about asset prices and that the Fed would continue to support the economy no matter if prices continued to climb higher.

The Fed and MD: Continuous assessment and action ready

Like the Fed, we will continue to assess a wide range of information – incoming economic data, public health information, developments from around the world, and prevailing market conditions – and remain ready to adjust our strategy if needed.  

We are currently overweight U.S. equities and underweight the U.S. dollar in our portfolio strategy and with the Fed’s Wednesday announcement being in line with our expectations, we believe we are appropriately positioned at this time. There will not be any material adjustments to our strategy as a result.

Following the Fed’s announcement, U.S. equities initially jumped, but closed down for the day. The U.S. dollar appreciated relative to other major currencies and 10-Year U.S. Treasury yields moved lower for the day.

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.

About the Author

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

Profile Photo of Edward Golding