- 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.
Recommended for you
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.