The Federal Open Market Committee (FOMC) announced Thursday that it would continue to hold interest rates at current levels, despite signs that the U.S. economy has made some much needed gains in the preceding months.
Of course, as noted by Federal Reserve Chair Jerome Powell, the COVID-19 pandemic is still causing tremendous human and economic hardship across the United States and around the world. During the past month in particular, economic activity and employment have continued to recover, Powell says, but they remain well below the levels seen at the beginning of the year.
Helping to determine the Federal Reserve’s position is the fact that weaker overall demand and earlier declines in oil prices have been holding down consumer price inflation. As such, overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
As its mission is currently defined, the FOMC seeks to achieve maximum employment and inflation at the rate of 2% “over the longer run.” With inflation running persistently below this longer-run goal, the FOMC will aim to achieve inflation moderately above 2% for some time, so that inflation averages 2% over time and longer-term inflation expectations remain anchored at 2%. Moving forward, the FOMC says it expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. Though a different outcome is certainly possible, market experts anticipate accommodative policies to continue for at least the next three to five years, and potentially much longer.
The FOMC also announced on Thursday that, 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 to households and businesses.”
Another notable fact about the Thursday meeting is that the FOMC policy vote was unanimous, in a change from recent meetings.
In written comments reflecting on the FOMC update, John Vail, chief global strategist at Nikko Asset Management, says U.S. third quarter earnings have been “extremely good,” as costs continued to be pared and pricing power seems very strong in many industries.
“Advertising costs and product discounting seemed particularly reduced in many industries,” Vail says. “Tech hardware and software demand surged particularly impressively. Auto companies reported much better profits than expected, due to demand for high-priced models and curtailed costs. So far in the fourth quarter, there seems little reason to expect earnings to disappoint, and, in the end, corporate profits and their future outlook are the main determinants of equity performance.”
Vail says he feels one area of concern is the lack of market attention to the fact that many recent mega-mergers, particularly in the tech sector, could be blocked on anti-competitive grounds.