As expected by most U.S. Federal Reserve watchers, the Fed chose to maintain its target federal funds rate at 1.50% to 1.75%. Furthermore it signaled that it has no plans to move rates in 2020.
With that being said, the Fed also stated “if developments emerge that cause a material reassessment of our outlook, we could respond accordingly" which was a reference to ongoing geopolitical risks such as the Coronavirus outbreak in China, trade disputes and Brexit.
No major changes in wages, unemployment, household spending or inflation
Looking at the key economic variables that the Fed uses to determine its decisions, it's easy to see why the status quo is the way to go at this time. Once again, the labour market remains strong and economic activity has been rising at a moderate rate. Job gains remain solid and the unemployment remains low. Household spending continues to rise at a moderate pace but business fixed investment and exports remain weak. Overall inflation and inflation for non-food and energy items continues to run at below 2.0%.
Injecting more liquidity into markets: That's a good thing for investors
The Fed has extended its duration of repurchase operations which, last month, were supposed to conclude in January 2020, to at least April 2020. Repurchase agreements are essentially ultra short-term loans in which the Fed buys securities from investors, then sells them back at a slightly higher price.
These actions signal that the market is still in need of liquidity injections to ensure stability. Further injections of liquidity should be viewed as favourable for equity markets. The Fed's decision reinforces our view that central banks around the world remain very accommodative and supportive of improving global economic activity.
What will the Fed do next?
Overall, the Fed's actions fit within the Federal Open Market Committee's mandate to foster maximum employment and price stability. The decision to maintain the current target rate supports its goals of a strong labour market, sustained economic expansion and its 2% inflation objective.
While there are no plans to change rates this year, the Fed plans to monitor all contributing factors including measures of labor market conditions, indicators of inflation and financial and international developments.
As the Fed's outlook is broadly inline with our own expectations, we do not anticipate any material changes to our positioning at this time as a result of Wednesday's rate announcement. With that being said, please don't hesitate to reach out to your MD Advisor* with any questions you may have.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).