Federal Reserve maintains supportive monetary policy

July 28 | Market news

Key takeaways

  • The U.S. Federal Reserve reaffirmed its supportive monetary policy, maintaining low interest rates and continuing asset purchases despite strengthening economic activity and improving employment.
  • The Fed initiated the discussion on when to begin reducing bond purchases, which we anticipate will occur around year-end and precede the first interest rate increase by approximately 12 to 18 months.
  • Today’s announcement is consistent with our positive outlook on the economy and diversified portfolios. Policymakers maintain significant optionality to slow down or speed up policy normalization as economic data evolves.

As expected, the U.S. Federal Reserve (Fed) held target interest rates unchanged and near zero today following its regularly scheduled two-day meeting. The Fed noted its constructive economic outlook while monitoring risks from supply chain bottlenecks and COVID case growth. The Fed emphasized that pro-growth policies remain appropriate considering the progress required on employment gains before members are comfortable reducing asset purchases and eventually lifting target interest rates. Importantly, the Fed began discussions around timing to reduce bond purchases, a prerequisite signal to markets before actual purchase reductions, then interest rate hikes, occur.

Our positive outlook for diversified portfolios remains intact based on ongoing fiscal and monetary policy stimulus, economic reopening progress and supportive corporate fundamentals. Elevated asset valuations, rising COVID cases and more persistent inflation remain risks to our view.

Small- and mid-sized domestic equities led riskier asset prices higher today, while the S&P 500 Index representing larger U.S. companies rose modestly, remaining slightly below Monday’s all-time high. Treasury yields increased slightly, meaning bond prices fell; investors interpreted Chairman Jerome Powell’s comments as broadly positive regarding forward prospects. The 10-year Treasury bond currently yields 1.26 percent, up from 0.92 percent at the beginning of the year but down from the 2021 high near 1.76 percent in March.

At the Fed’s last meeting, seven of 18 members indicated they anticipated an initial interest rate hike in 2022. Slowing bond purchases around year-end would allow the Fed to retain the option to increase its target federal funds rate in late 2022 if economic conditions warrant, though 2023 may be more likely. With no new economic projections (which the Fed updates every other meeting), investors focused on today’s press conference. Fed Chairman Jerome Powell emphasized economic progress but highlighted the importance of employment moving closer to pre-pandemic levels. Payrolls remain 4.45 million below pre-COVID levels and even further below the long-term trend. Rising COVID cases are a risk to the outlook that may necessitate a slower accommodation removal process, along with uncertainty around the pace of job gains.

Our investment outlook remains “glass half-full” regarding the forward prospects for diversified portfolios. Rising earnings, continued reopening progress and accommodative central banks support our near-term outlook. We continue to encourage investors to retain a multi-year, multi-cycle perspective, being mindful of recent events but focusing on two key investment horizons: First, the current reopening activity around the globe and countries’ variable speeds and glidepaths as they emerge and, second, the steady state that follows and how sustainable growth may be throughout that second horizon.

As always, we value your trust and are here to help in any way we can. Please do not hesitate to let us know if we can help address your unique financial situation or be of assistance.

Download PDF


This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

Recommended for you

 

Developing your investment strategy

Knowing your investment goals and risk tolerance helps us diversify your portfolio with a mix of equities, bonds and real assets.

See why diversification matters

How will inflation impact investors in 2021?

Could an overheated economy trigger inflation? Our investment strategists weigh in.

Get the details

Is a market correction coming soon?

Equity markets have reached record highs after last year’s brief but deep decline in the wake of a global pandemic, raising concerns over a potential stock market bubble.

Read more