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Interest rates: Lower for longer…or forever?

September 2020

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On September 16, 2020, the U.S. Federal Reserve (Fed) left interest rates near zero and signaled that it expects to hold them there through at least 2023, adding outcome based guidance. The statement follows the new long-term policy framework announced by Chair Jay Powell in August at the Federal Reserve Bank of Kansas City’s annual Jackson Hole conference. The Fed notes that rates will remain near zero “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.” We didn’t get a precise definition of what a moderate overshoot would look like, allowing the Fed to retain some flexibility. Officials see inflation getting to 2% by 2023 and unemployment getting down to 4% around that time. 

The Fed also committed to continue buying Treasuries and mortgage-backed securities “at least at the current pace to sustain smooth market functioning.” These purchase amounts are currently $80 billion of Treasuries per month and $40 billion of mortgage-backed securities. Economic forecasts for this year were also upgraded with a lower unemployment rate and smaller GDP contraction than previously expected. 

There were two dissents at the meeting, with Dallas Fed President Robert Kaplan preferring to retain “greater policy rate flexibility” given the quick pace of the recent recovery and Minneapolis Fed President Neel Kashkari wanting to wait for a rate hike until “core inflation has reached 2% on a sustained basis.”

Our take

This announcement is further confirmation that the Fed is prepared to provide whatever support the economy needs including further action should the recovery tail off. This stance includes a willingness to maintain (and potentially increase) asset purchases as well as tolerate above target inflation. While the market reaction was relatively muted, we believe this policy action continues to provide support for equities (in particular U.S. equities) as well as U.S. Investment Grade Corporates over the medium-term. Inflation expectations may also increase modestly as a result of this statement, though we view inflationary and deflationary risks to be roughly balanced and maintain a neutral stance on rates.

Disclosures

This is not intended to serve as a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This presentation may contain forward-looking statements. “Forward-looking statements,” can be identified by the use of forward-looking terminology such as “may”, “should”, “expect”, “anticipate”, “outlook”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof, or variations thereon, or other comparable terminology. Investors are cautioned not to place undue reliance on such statements, as actual results could differ materially due to various risks and uncertainties. This publication is prepared for general information only. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investment involves risk. Market conditions and trends will fluctuate. The value of an investment as well as income associated with investments may rise or fall. Accordingly, investors may receive back less than originally invested.

Past performance is not necessarily a guide to future performance. Asset allocation does not ensure a profit or guarantee against loss.

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