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No tantrum after the Fed’s taper talk

Close up image of Federal Reserve

This week’s decision by the U.S. Federal Reserve (Fed) to leave interest rates unchanged was once again underscored by the pandemic theme: The virus remains the key variable when it comes to determining the path of the economic recovery. With the Delta variant fueling another rise in COVID-19 cases, the Fed this week unanimously decided to hold fast on its accommodative stance and keep the federal funds rate at 0-to-0.25%. Perhaps more notable is that they left their quantitative easing program intact and unchanged.

The Fed: Adjustments are coming

However, the forward guidance provided by the Fed is clear and change is on the way. The Fed signaled that conditions have improved and soon may warrant the tapering of asset purchases. In remarks to the media, Chairman Jerome Powell indicated that it could come as soon as the next Committee meeting in November. Regarding interest rates, it’s interesting to note that the Fed is split in terms of members who think rates will start to rise in 2022 and those who believe it may take longer.

Taper time?

How will we know we’re ready to taper? The Fed remains firmly focused on a couple of key factors over the longer-run – achieving maximum employment and an inflection point whereby inflation reaches 2% sustainably.

Vaccination progress has been positive but rising infections have slowed the economic recovery in the sectors most heavily impacted by the pandemic. Coupled with the Delta variant, the Fed has brought down its growth projections for GDP by 1.1% for 2021 (to 5.9%) and instead bumped its forecast for 2022 up by 0.5% (to 3.8%). Unemployment was revised upwards to 4.8% in 2021 (from 4.5%).

On the inflation front, the Fed remains unconcerned with elevated short-term measures. It expects inflation to run higher both this year and into 2022 before moving towards that all important, longer-term 2% target.

Supportive conditions persist

The Fed once again reiterated that policy would remain accommodative until its employment and inflation goals are sustainably met. Despite talk of policy tapering, markets welcomed the Fed announcement with a small run-up in equity markets immediately following the Fed’s statements.

As for our portfolios, we remain overweight in equities overall (we still expect outperformance versus fixed income) with more emphasis on developed markets (especially the U.S.) as opposed to emerging markets. That’s following a modest pullback in our equity exposure over the spring and summer.

For 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 of 1832 Asset Management L.P. His primary focus is MD’s North American equity funds and pools.

Profile Photo of Richard Schmidt