Yesterday the Federal Reserve issued the Federal Open Market Committee (FOMC) statement. In the statement it focused on Interest rates going forward and protecting U.S. economic growth.
Many market participants were holding their breath while the FOMC met to discuss the looming spectre of inflation which we wrote about earlier this year. Stocks, Bonds, nearly everything in the investment world has been affected.
What were the most important things that the Federal Reserve had to share?
“The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below 2 percent. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
“In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
In response to the Statement, several companies have shared their feedback, we bring some of this feedback to our readers.
Commenting on the Fed’s latest policy decision, Toby Sturgeon, Global Head of Fiduciary Investment Services at ZEDRA, said:
“Federal Reserve Chair Jerome Powell retained a dovish stance during the central bank’s latest policy decision. He reiterated that they would be carefully looking ahead to ensure there was tangible evidence the U.S. economy has fully recovered. Policymakers don’t anticipate an increase in interest rates at least until 2023. The S&P 500 rose to a record high and yields on US Treasuries fell from session highs on the news as they upgraded the outlook for the U.S. economy to a 6.5% annual rate. Yields had been steadily rising in recent weeks due to the recovery and the likelihood for higher inflation.”
Commenting on the market’s reaction to the Fed’s updated growth forecast, Rupert Thompson, Chief Investment Officer at Kingswood, said: “The Federal Reserve did its best yesterday to convince the markets that it still has every intention to do all it can to support the economic recovery and has no plan to tighten policy any time soon. The Fed revised up this year’s growth forecast sharply to 6.5% from 4.2% and also nudged up its projection for core inflation to 2.2% from 1.8%. Yet, it kept its very dovish guidance of late unchanged and the majority of the Fed continues to forecast no rate hike before 2024. Equity markets have taken comfort from the Fed’s soothing words with US equities closing higher and European markets also up this morning. Meanwhile, the dollar fell back slightly and US Treasury yields edged lower as markets scaled back their timetable for rate hikes a little, although they are still pricing in two rate hikes for 2023 unlike the Fed which is projecting none.”
Commenting on the Fed keeping a zero-rate outlook, Olivier Konzeoue, FX Sales Trader at Saxo Markets, said: “A cautious Fed decided to keep rates near zero and to maintain the pace of its monthly assets purchase at $120Bn but upgraded its economic outlook resulting in a change in the dot plot with seven out of 18 fed officials seeing a rate hike in 2023. The FOMC highlighted a rapid but uneven economic recovery, whilst the Fed core inflation forecasts reveal a drop in 2022 which could be attributed to the potential permanent destruction of jobs caused by a large amount of companies forced to adapt and increase productivity to survive the pandemic.
“The Fed therefore deems it important to maintain accommodative financial conditions and is happy to see inflation run hot for some time in order to return to full employment by 2023. A sigh of relief for US Equities instantly paring some of their earlier losses with S&P trading flat and Nasdaq back to -0.3% from -1.5% on the day whilst Dow jumped 150 points. USD retreated across the board with US short end rates lower and US 10y Yields at 1.63% from 1.66%, EUR led the charge back up to 1.1974 whilst AUD is back to flirting with 0.78 and cable back to 1.3950 area.”
For the next few months there is some hope of stability. Whether this new approach by the Federal Reserve will be good in the long run remains to be seen though.
Author: Andy Samu
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