The Federal Reserve (Fed) left its policy rate unchanged at the July meeting and announced it expects to continue buying U.S. Treasury and agency securities at the current pace for the foreseeable future. Treasury yields were little changed following the widely anticipated statement, but risk assets staged a rally into the close on the heels of Chairman Powell’s comment that the Fed ‘is not even thinking about raising rates’ and is “committed to using its full range of policy tools” until it achieves its dual mandate of full employment and price stability.
Although household financial conditions improved since May, the Fed had observed a slower pace of economic activity since mid-June when positive case counts began to rise. Powell acknowledged the future economic path depended on the course of the virus, renewed mitigation efforts and progress toward a treatment. That said, the Fed’s base case calls for a slow labor market recovery, which appears reasonable given the stubbornly high level of continuing jobless claims.
Weak labor market conditions and the recent slowdown in economic activity suggest core inflation will stay below the Fed’s 2.0 percent target for some time despite the magnitude of fiscal and monetary stimulus. As members of Congress continue to debate the particulars of another round of government stimulus, several Federal Reserve facilities created in March to support the smooth function of financial markets remain underutilized. During his virtual press conference, Powell candidly offered that he believes market participants, anticipating that the Fed would backstop risk assets, stepped into to purchase securities in those markets. Forward guidance is still a potent monetary policy tool!
The next few weeks will offer additional economic signposts, notably, second-quarter GDP growth and non-farm payroll data, retail sales. Many supplemental household financial assistance programs are also set to expire, setting up for a potential spending cliff should Congress delay another round of fiscal stimulus.
As noted in our mid-year update, investors should remain vigilant as global economies stabilize and recover. In these uncertain times, we encourage investors to stick with a thoughtful asset allocation that aligns with their investment horizon.
For more information and assistance, contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
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