Low For Years
Federal Reserve (Fed) officials reaffirmed their commitment to support the economy and financial markets, U.S. businesses of all sizes, and households, as the committee expects to maintain the current pace of asset purchases. Their projections–the first in six months– also showed an expected improvement in the unemployment rate from current levels to 9.3% by year’s end in addition to the fed funds rate remaining near zero through 2022. In response to the latest jobs report from the Bureau of Labor Statistics that showed a surprising 2.5 million increase in May, Chairman Jerome Powell said, "The Fed will not react to a single data point." The Fed warned that an economic recovery in the second half of 2020 would be contingent on a return-to-normal for businesses and consumers. Below are the language changes made in the Fed’s statement from April:
|June 10, 2020 Statement||April 29, 2020 Statement|
|"Financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses."||“The disruptions to economic activity here and abroad have significantly affected the financial conditions and have impaired the flow of credit to U.S. householdsand businesses.”|
|“ . . . over the coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning.”||“. . . the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning.”|
While there was little doubt of a continued hold on rates, projections are expecting a calendar year loss of 6.5% to gross domestic product (GDP), and unemployment to remain above 5% through 2022. Additionally, inflation indicators were lowered in each of the next three calendar years. Below are the committee’s projections for GDP, unemployment, inflation, and the federal funds rate for 2020 and the years ahead:
The Fed Dot Plot show rates remaining at current levels through 2022, as median projections show no anticipated rate hike for the next two years. While all projections expect to keep the funds rate near zero through the end of 2021, two officials saw rates increasing in 2022:
Target Federal Funds Rate Dot Plot
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.
On the day of the FOMC’s statement, the 10-year Treasury dropped 9 basis points to 0.75%, while short and long rates also fell:
With the committee reaffirming their stance to remain aggressively supportive in their actions until they are confident the economy is on the road to recovery, it was reiterated that these are "lending powers and not spending powers." This is an important element within our economic ecosystem, as the central bank is willing to provide liquidity and low rates, which provides a foundation for expansion and stability. However, growth will be dependent on demand, to which fiscal policy is better equipped to assist. Lastly, in looking at their projections, increases in money supply, deficits, and liquidity does not seem to be an inflationary concern at this time, as Core PCE and PCE Inflation were lowered in each of the next three years relative to the December projection. We expect rates, across the curve, to remain suppressed. The next meeting is scheduled for July 28-29. The dollar rebounded from day-lows, while U.S. stocks erased initial gains as Powell spoke. The DJIA and S&P 500® indices finished the day down -1.04% and -0.53%, respectively.
One basis point is equal to 0.01%.
Core personal consumption expenditures (PCE) price index is the Fed’s preferred measure of U.S. inflation, which measures the prices consumers pay for goods and services without the volatility caused by energy and food prices.
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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This publication is provided by Pacific Funds. Pacific Funds refers to Pacific Funds Series Trust. This commentary reflects the views of Pacific Global Asset Management LLC, the asset management division of Pacific Life Insurance Company that sponsors Pacific Funds, as of June 11, 2019, are based on current market conditions, and are subject to change without notice. These views are presented for informational purposes only, should not be construed as investment advice, an endorsement of any security, mutual fund, sector, or index, the offer or sale of any investment, or to predict performance of any investment. Any forward-looking statements are not guaranteed. All materials are compiled from sources believed to be reliable, but accuracy cannot be guaranteed.
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