An "Average" Meeting


September 2020

Fed officials expect rates to remain near zero through 2023; the inflation goal is to now average 2% over time.

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Key Points:

  • As expected, the Federal Open Market Committee held the federal funds target-rate range at 0.00-0.25%.
  • Fed officials expect rates to remain near zero through 2023.
  • FOMC’s language changes primarily focused on inflation, emphasizing that the committee will target an inflation rate moderately above 2% “for some time so that inflation averages 2 percent over time.”
  • Fed projections showed an improvement by year’s end in the current unemployment rate (from 9.3% to 7.6%) and GDP (from -6.5% to -3.7%).

 



At their September meeting, Federal Reserve (Fed) officials kept interest rates near zero and said they expect those low rates to remain through 2023. They also reaffirmed their support for the economy and financial markets until inflation rises above 2% “for some time,” which they projected to be in 2023.

As part of its ongoing and aggressive accommodative stance, the Fed expects to maintain the current pace of asset purchases and to continue to provide a backstop to aid a recovery that focuses on maximum employment and price stability.

“Fiscal policy response had a really positive effect, but more fiscal support is likely to be needed,” said Chairman Jerome Powell, who also noted that the Fed had only “lending powers and not spending power.”

September’s projections showed improved optimism by the committee, which predicted that by year’s end the unemployment rate and gross domestic product (GDP) would be better than previously predicted in June, as projections were adjusted from 9.3% to 7.6% for unemployment and from -6.5% to -3.7% for U.S. GDP. In June, the Fed predicted an economic recovery was likely in the second half of 2020. Today, household spending has recovered about 75% of its earlier declines as the reopened economy has steadily gained traction across cities and states.

Below are the language changes made in the Fed’s statement from July:

 

July 29, 2020 Statement September 16, 2020 Statement
“ Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at thebeginning of the year.”  “ Economic activity and employment have picked up inrecent months…” 
“ The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take inflation expectations, and readings on financial and international developments. into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial andinternational developments.”  “ 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, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit tohouseholds and businesses.” 

 

As the market did not anticipate a change in the Fed’s stance of low-rates-for-longer, investors focused on FOMC’s economic projections and the committee’s new language around inflation. This was only the second glimpse in 2020 of the estimates (March projections were canceled due to the COVID-19 pandemic). Here are the committee’s September projections for GDP, unemployment, inflation, and the federal funds rate for 2020 and the next three years:

Median Table_800px

The “Dot Plot” showed rates to remain at current levels now through 2023, as median projections show no rate hike for the next three years. While all policymakers expect to keep the funds rate near zero through the end of 2021, one official saw rates increasing in 2022 (compared to two officials in June’s projections), and four saw a higher fed funds rate in 2023:

 

Dot-Plot_800px

Source: U.S. Federal Reserve. The “dot plot” is a statistical chart consisting of data points plotted on a simple scale. Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual Federal Open Market Committee member’s view, where each participant at that particular meeting thinks the federal funds rate should be at the end of the year for the current year, the next few years, and the longer run. One participant did not submit longer-run projections for the federal funds rate. Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

 

The 10-year Treasury was lower by 1 basis point to 0.69%; short rates were flat; and long rates were 3 basis points higher on the day:

 

10-Year Treasury
10-Year-Treasury_FRED_800px

Source: FRED® as of 9/16/20

Conclusion

Markets lost some traction during the Fed’s press conference as investors got their second glimpse at Fed projections post the COVID-19 bottom. The dollar rebounded from day lows, while U.S. stocks erased initial gains as Chairman Powell spoke. The Dow Jones Industrial Average and S&P 500® indices finished the day mixed at +0.13% and -0.46%, respectively. Fed officials reaffirmed their stance that policy will remain highly accommodative until they are confident the economy is far along the road to recovery. The committee indicated it is confident and determined to achieve the 2% average inflation goal under current policies. The commitment by Fed officials to keep rates near zero until 2023 indicates their belief in the depth of the economic problems and in the recovery time needed to get the economy back to pre-pandemic levels.

 

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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