Key takeaways
- The U.S. Federal Reserve (Fed) reaffirmed interest rates will likely remain low and asset purchases will continue for an extended period.
- Messaging reflected their new monetary policy approach announced last month, which seeks to average rather than target 2 percent inflation.
- The updated statement indicates rates will remain low until the economy reaches maximum employment and is on track to moderately exceed 2 percent for some time.
- Today’s announcement is consistent with our “glass half full” view on the path forward.
As expected, the U.S. Federal Reserve (Fed) held interest rates unchanged and near zero today following its regularly scheduled two-day meeting. The Fed’s new monetary policy framework announced last month embraces inflation averaging (allowing inflation to overshoot its 2 percent target to make up for past shortfalls), solidifying accommodative policy for years. That new approach was on clear display throughout the Fed’s statement, summary of economic projections and Chairman Jerome Powell’s press conference. Today’s meeting reinforces our “glass half full” outlook and reaffirms that policy support will continue in force for the foreseeable future.
Many investors have anticipated guidance some time in coming months (possibly today) to clarify a specific rules-based approach around when rates would eventually rise. Chairman Powell pushed back on this notion, stating the Fed’s decisions are based on “a whole range of things” and “not a rule.” We interpret his point as meaning decisions are based on a significant number of variables and represent more of an art than science. The summary of economic projections and official statement did deliver powerful guidance that policy will remain extraordinarily supportive, but some investors still want more details in relation to rate hikes under different inflation or employment scenarios.
Mixed stock performance likely reflected some disappointment that further forward guidance in the near term may be unlikely. Small company and value stocks outperformed large company and growth stocks. Bond yields were slightly higher.
The Fed’s summary of economic projections served as an important signal on its new policy framework. Median member expectations extending to 2023 anticipate inflation will reach 2 percent and the unemployment rate will improve to 4 percent, while the target policy rate will remain unchanged near zero. This emphasis on holding rates low even when inflation and employment return to more favorable levels reinforces their message of ongoing policy support. Similarly, changes to the official statement were material relative to their last meeting, but largely tie the statement directly to updated framework language released late last month. The statement specifically noted rates should remain near zero until “inflation is on track to moderately exceed 2 percent for some time.” The messaging out of the Fed and other central banks continues to support the economic recovery and provides a forceful policy tailwind to capital markets.
The Fed’s recent communications indicate it could deliver additional guidance in between meetings as members see fit, which could serve as an important backstop as we enter a period of potential volatility around elections, back-to-school and vaccine news. Any off-cycle communications are more likely if financial conditions take a turn for the worse. One example could be a Fed speaker using an announcement of increased corporate bond purchases to stabilize market sentiment, if necessary. Fed corporate bond purchases have slowed considerably as corporate yield spreads compared to Treasuries have fallen to historically normal levels. The Fed has only used 5 percent of its available secondary market corporate facility, giving ample room for additional bond market support.
We continue to emphasize a glass half-full outlook as we evaluate market conditions and the investment landscape. While respecting the two-sided nature of market uncertainty, the Fed’s ongoing policy support and optimism for an eventual virus vaccine outweigh election uncertainty and virus resurgence risks during the back-to-school season. As always, we value your trust and are here to help in any way we can. Please do not hesitate to let us know if we can help address your unique financial situation or be of assistance.
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