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Fed holds benchmark rate steady as U.S. economic recovery slows

United-states federal reserve building.

No big surprises from the U.S. Federal Reserve (Fed) as it left its benchmark interest rate unchanged and noted that the pace of economic recovery in the U.S. has slowed. 

COVID-19 remains top of mind

The target range for the federal funds rate will remain at 0-to-0.25% as the Fed keeps a close eye on unemployment, inflation, and the ongoing impact of the COVID-19 virus which still poses a considerable risk to the economic outlook. 

Wednesday's announcement saw the Fed point specifically to challenges faced by sectors most adversely affected by the pandemic, with weaker demand and dropping oil prices keeping inflation low. Moving ahead, the path of economic recovery will be closely tied to that of the virus and efforts to deliver vaccinations. 

Unwavering support

The Fed expects to maintain an accommodative monetary stance until unemployment drops and inflation reaches 2% or higher. Its historic bond-buying program will continue with Treasury holdings increasing by at least $80 billion a month and agency mortgage-backed securities by at least $40 billion a month. 

More stimulus could be on the table if conditions worsen. The Fed says it is prepared to further adjust its monetary policy in response to emerging risks to the U.S. economy, including public health, employment data, inflation and any additional financial or international developments. 

Latest announcement supports our positioning

Given the decision was widely expected by most – there was nothing new with regards to policy or tone – the Fed’s announcement did not materially disrupt markets. Stock prices dipped ahead of the announcement and did not change significantly after. 

Our portfolio positioning remains unchanged at this time. The announcement is aligned with our outlook – that policy makers will continue to provide unprecedented support for the global economy with equities continuing to outperform fixed income amid the very low interest rate environment.

The next U.S. Federal Reserve interest rate announcement is scheduled for March 17, 2021 and it will be accompanied by the latest Summary of Economic Projections.

If you have any questions or require more information, please 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

RICHARD SCHMIDT, CFA, is an Associate Portfolio Manager with the Multi-Asset Management team at MD Financial Management (MD). His primary focus is MD’s North American equity funds and pools.

Profile Photo of Richard Schmidt