No Surprises


November 9, 2020

As expected the Fed kept interest rates low and underscored the importance of a second stimulus package.

FOMC_5_June

Key Points:

  • As expected, the Federal Open Market Committee held the federal funds target rate range at 0.00-0.25%, though two members dissented.
  • Federal Reserve (Fed) officials made minor language changes to their September statement, noting that economic activity and jobs “have continued to recover” and “earlier declines in oil prices” have held down consumer price inflation.
  • Fed officials acknowledged the current challenge facing the economy was the spike of COVID-19 cases; accordingly, they adjusted their view of financial conditions from “have improved” to “remain accommodative.”

 



At the November Federal Open Market Committee (FOMC) meeting, Fed officials—as expected—reaffirmed their stance to support the economy and financial markets by keeping interest rates near zero. The committee reaffirmed its commitment to achieving maximum employment and price stability, acknowledging the economic downturn has not affected everyone equally and the dislocation in the economy continues to make the future uncertain for many. Chair Jerome Powell stated again that more “fiscal support is needed,” a nod to the urgency of a second stimulus package, which has stalled in Congress. Below are the language changes the Fed made to its September statement:
 

September 16, 2020 Statement
November 5, 2020 Statement
“ Economic activity and employment have picked up in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”   “ Economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow ofcredit to U.S. households and businesses.” 

 

At the start of the week, the 10-year and 2-year Treasury spread was 71 basis points and closed the day at 65 basis points as investors looked to offset equity risk with U.S. Treasuries. The 10-year Treasury was higher by 7 basis points to 0.79%, while short and long rates were unchanged or lower on the day:

 

10-Year Treasury
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Source: FRED® as of 11/5/20

 

In Conclusion

Markets lost some traction during the Fed’s press conference as Chair Powell reminded investors that the growth trajectory for the U.S. is largely dependent on the path of COVID-19. The dollar fell during the day, while U.S. stocks erased some of the gains from earlier in the session. The Dow Jones Industrial Average and S&P 500® Indexes finished the day up 1.95% and 1.94%, respectively. While U.S. gross domestic product grew in the third quarter by an annualized rate of 33.1% and 11.4 million jobs have been recovered, Fed officials acknowledged that they must continue to monitor the current economic environment, which could deteriorate if the pandemic continues to rage and Congress fails to pass an adequate second stimulus package.

 

One basis point is equal to 0.01%.

The Dow Jones Industrial Average index (DJIA) tracks the share price of the top 30 large, publicly-owned U.S. companies which is often used as an indicator of the overall condition of the U.S. stock market.

The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.

 

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