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As expected, the Fed will hold rates near zero

United States federal reserve system signature stamp.

To kick off its announcement this week, the U.S. Federal Reserve (Fed) reiterated that it is “committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.” As expected, the Fed announced on Wednesday that it would hold the target for the federal funds rate at 0%-to-0.25%. Furthermore, to ensure smooth market operation and to maintain supportive financial conditions for households and businesses, the Fed will increase the purchasing of Treasury securities and agency mortgage-backed securities over the coming months.

Conditions are improving, but still behind pre-COVID-19 levels

A large portion of the Fed’s announcement revolved around the pandemic. While overall financial conditions have improved, reflecting the positive impact of supportive policy measures enacted around the world, the Fed admits that the ongoing recovery will depend significantly on the containment of the virus. “The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

The pandemic continues to inflict “tremendous human and economic hardship across the United States and around the world. Economic activity and employment have picked up in recent months but remain well below their levels at the beginning of the year.” The Fed upgraded its 2020 GDP forecast to -3.7% (from -6.5%), but downgraded forecasts for 2021 (4% from 5%), 2022 (3% from 3.5%), while leaving 2023 (2.5%) unchanged.

The fed remains focused on maximum employment and 2% inflation

It’s immediately clear that the Fed is operating to achieve maximum employment and its sustainable 2% inflation target. Weaker demand and bargain-bin oil prices continue to hold down inflation well below this longer-term target. The Fed “expects to maintain an accommodative stance of monetary policy until these outcomes are achieved.” Inflation expectations have been bumped up, but the Fed does not expect it to run higher than its target even by 2023.

Our strategy already reflects this current environment

Immediately following the announcement, the S&P 500 marginally declined, the U.S. dollar appreciated against the Canadian dollar, and 10-year U.S. bond yields moved modestly higher.

As the Fed's actions were broadly expected, our portfolios are appropriately positioned at this time. The Feds announcement is aligned with our expectations for a prolonged period of supportive policy, subdued inflation, and lower interest rates. As a result, no material changes to our strategy are required.

Do not hesitate to contact your MD Advisor* for more information.

* 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.

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