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Still waiting…Fed holds on interest rates, asset purchases as virus continues to weigh on outlook

With the U.S. Federal Reserve (Fed) updating its forecasts after the summer in September, it was unlikely the Fed was going to be decisive with regards to policy and guidance during this week’s announcement. As expected, nothing was changed – the target for the federal funds rate is still at 0-to-0.25% and the Fed continues to increase its holdings of Treasury securities and mortgage-backed securities by US$80 billion and US$40 billion a month, respectively.

Not quite there yet to start pulling back supportive policy

That was the key takeaway in today’s announcement from the Fed as it reaffirmed its commitment to a path of strong monetary support. The main message: It’s a waiting game. The Fed’s historically accommodative stance will remain in place until it sees progress toward maximum employment. It mentioned that the economy has made steps in the right direction, hinting that tapering (the process of reducing supportive policy) may be on the horizon. Furthermore, it will continue to assess progress in upcoming meetings.

While the base case remains that vaccinations will improve the future state and economic activity and employment have picked up speed, the Fed still cautions that the virus continues to play a significant part in the path to recovery.

Unfazed by inflation

The Fed also remains unworried about the recent spike in inflation, calling it reflective of short-term conditions. Looking further out, the Fed is waiting for inflation to hit a sustainable level of above 2% and has kept its longer-term expectations anchored at 2%.

It is our expectation that the economy will continue to improve and guidance from the Fed regarding tapering (likely to commence in the early part of 2022) is ahead.

Risk assets remain well supported

Our portfolios continue to be positioned with an overweight allocation to equities, however we have trended that overweight down modestly over the past few months. Financial conditions remain supportive of equities and we continue to expect outperformance relative to fixed income.

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 a Senior Investment Analyst with the Multi-Asset Management team at MD Financial Management. He provides research and analysis for all fixed income and equity mandates.

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