The Fed notes improving economy, higher inflation, but expects to hold rates until 2023
Unsurprisingly, the U.S. Federal Reserve (Fed) decided to keep the target range for the federal funds rate at 0-to-0.25% on Wednesday afternoon. Furthermore, the Fed reconfirmed it plans to purchase Treasuries and agency mortgage-backed securities by at least US$80 billion and US$40 billion per month respectively.
The Fed expects this supportive policy to continue until its maximum employment and long-term 2% inflation objectives are sustainably achieved.
Positive signs for the U.S. economic recovery
After the pace of the recovery slowed in the U.S., indicators have rebounded recently. Gross domestic product is expected to increase by 6.5% in 2021 (an improvement from the December round of projections), 3.3% in 2022 and 2.2% in 2023. In addition to the increase in productivity, the Fed expects unemployment to decrease to 4.5% in 2021 (again, an improvement from December), 4.2% in 2022 and 3.7% in 2023.
Balancing this positive news is the Fed’s unchanged view regarding the pandemic – that “sectors most adversely affected by the pandemic remain weak” and “the path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook.”
The Fed looks convinced rates will remain unchanged through 2023
Along with updated growth and employment projections, expectations for inflation moved higher. The Fed expects 2.2% inflation for 2021, 2.0% in 2022 and 2.1% for 2023. How will these recent improvements impact policy? Not materially apparently, as most members (14 out of 18) of the Federal Open Market Committee still expects to hold rates at current levels until at least 2023.
Investors appeared to enjoy the reassurance as both the S&P 500 Index and the Dow Jones Industrial Average Index traded higher and longer duration bond yields stayed positive following the 2:00 PM EST announcement.
The Fed announcement supports our positioning
No changes to our positioning are required as a result of the Fed’s announcement. Our outlook that equities will continue to outperform fixed income is still valid as policy makers continue to provide meaningful support in the recovery of the global economy.
In fact, the Fed’s statement supports our recent tactical asset allocation adjustments whereby we increased our overall overweight to equities relative to fixed income on positive vaccine developments and additional fiscal stimulus in the U.S.
The next U.S. Federal Reserve interest rate announcement is scheduled for April 28, 2021.
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.