The Fed Spoke. Markets Shrugged.

Matt Bacon         Sep 17, 2020

The Federal Open Market Committee met yesterday and left interest rates unchanged. We weren’t surprised. General economic conditions are poor and will likely remain poor until the public health crisis brought about by the pandemic is resolved. The Fed will need to maintain what they call an “accommodative” stance until then, part of which means low interest rates. (You can find the press release from the meeting here.)

Markets have anticipated and priced in low interest rates out to about 2023. This comes on the back of a myriad of forecasts all projecting weak fundamentals and an economy more or less in recovery mode until then. The Fed all but confirmed these forecasts when providing their own inflation estimates yesterday, with Chairman Powell saying they expect current rates to be appropriate until they hit their inflation target of 2% (estimated to achieve that in 2023). When the target is hit there is a reasonable expectation that the Fed will begin to raise rates in order to keep inflation above the target rate in check. This means a few things:

  1. Mortgage are set to stay low for some time. This will help spur expansion in homebuilding and fees at banks for mortgage origination and refinancing. The Financials Select Sector SPDR (XLF) and Homebuilders Select Sector SDPR (XHB) both finished up yesterday by 1.13% and 1.59% respectively, edging out the broad S&P 500 which finished down 0.46%.
  2. Yields on long dated treasuries rose slightly yesterday. In the bond world an increase in yield means a decrease in price. Investors made small moves out of the safety of treasuries and into other broader asset classes on the Fed’s continued accommodative stance.

The Fed also committed to maintaining asset purchases at their current rate, which will keep the tailwind going for the corporate bond market. The Fed is already the third largest owner of LQD, which is the ticker symbol for the largest corporate bond ETF in the US. They may become the largest owner before all this is through.

Perhaps the strongest signal from Chairman Powell was his statement that more fiscal support is likely to be needed. In the current climate, this leaves us wondering what grim calculus must be performed on the likelihood of a second fiscal stimulus bill. Congress appears stymied by the matter with less than 60 days to the election.

Ultimately, today was a statement that everything is much the same. No interest rate changes, no policy changes, and no change in outlook or posturing. Sometimes the best news is no news. The Fed spoke. Markets shrugged.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risks and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation.

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