The Fed Signals More Accommodation in 2021 | Lord Abbett
Image alt tag

Error!

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Tracked Funds

You have 0 funds on your mutual fund watch list.

Begin by selecting funds to create a personalized watch list.

(as of 12/05/2015)

Pending Orders

You have 0 items in your cart.

Subscribe and order forms, fact sheets, presentations, and other documents that can help advisers grow their business.

Reset Your Password

Financial Professionals*

Your password must be a minimum of characters.

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

 

Economic Insights

Here’s a look at the U.S. Federal Reserve’s actions at its final policy meeting of 2020—and the implications for interest rates, inflation, an risk assets in the coming year.

Read time: 2 minutes

In the final policy meeting of a momentous year, the U.S. Federal Reserve (Fed) laid the groundwork for additional monetary accommodation in 2021. In the most significant policy action, detailed in a post-meeting press release on December 16, the Fed’s policy-setting arm, the Federal Open Market Committee (FOMC), pledged to “ ... continue to increase its holdings of [U.S.] Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals...” (emphasis added).

By tying asset purchases to its so-called dual mandate, the FOMC brought quantitative easing (QE) under the same umbrella as forward guidance on short-term interest rates and the new flexible average inflation targeting framework.

If the FOMC was to maintain the current pace of asset purchases until the end of 2021, its balance sheet would expand by approximately $1.5 trillion. That would be a substantial increase on top of the $2.9 trillion expansion the Fed has undertaken since mid-March. The goal of incremental purchases is to maintain both smooth market functioning and accommodative financial conditions that support an ongoing economic recovery from the disruptions caused by the COVID-19 virus.

In a post-meeting press conference, Fed Chair Jerome Powell mentioned that the FOMC will inform the public “well in advance” of any tapering of asset purchases. Since it has already been announced that tapering of asset purchases including, presumably, a period of balance sheet stability, will precede any interest rate increases, it appears reasonable that rates will remain at the current level until at least mid-2023, as is embedded in market prices.

Powell noted that maturity extension of the Fed’s portfolio was discussed at the November 2020 FOMC meeting. To be sure, such a move is not high on the list of possibilities for additional modifications to the Fed’s current policy settings. But Powell said that it was part of the toolkit the Fed has at its disposal—along with additional rate guidance and more aggressive QE—should additional accommodation be required.

Additional Takeaways
We think there were some interesting additional nuances in his statement before the press conference that suggested flexible average inflation targeting, the new operating procedure the FOMC formally adopted in September, really does need to be understood as a significant regime change.

  • Powell stated that policy will remain highly accommodative for a long time, until the goals of maximum employment and (sustainable) 2% average inflation are nearly reached, which is not the way it has been done in the past.
  • He said that if pent-up demand for services leads to a burst of price increases in 2021 that this would be viewed as transient, i.e. not an indication that inflation had increased sustainably.
  • He appears to be benchmarking the labor market to the state the economy was in immediately prior to the pandemic—sub-4% unemployment—as a guide for whether maximum employment was close at hand.

Policy and Investment Implications

There was no hint that the FOMC is in any way uneasy about maintaining low rates for an indefinite period due to financial stability considerations or that it has any qualms about ongoing aggressive balance sheet expansion for an indefinite period if that is required to maintain accommodative financial conditions. It adds up to a policy stance that is highly supportive of risk asset prices and promises to remain so until inflation accelerates to 2% sustainably, a condition that we believe may not come to pass for many years.
 

Webinar: 2021 Investment Outlook
January 7, 2021

Giulio Martini will be among the Lord Abbett experts joining Investment Strategist Tim Paulson in a discussion about fixed income and equity markets in the year ahead, plus thoughts on key economic indicators, global trade, fiscal stimulus and monetary policy, a COVID-19 vaccine and more. Register now!

 

The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. U.S. Treasuries are debt obligations issued and backed by the full faith and credit of the U.S. government. Income from Treasury securities is exempt from state and local taxes. Although Treasuries are considered to have low credit risk, they are affected by other types of risk—mainly interest rate risk (when interest rates rise, the market value of debt obligations tends to drop) and inflation risk. The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy.                                                                

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Fed refers to the U.S. Federal Reserve.

Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education.  No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.   If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.

ABOUT THE AUTHOR

image

Please confirm your literature shipping address

Please review the address information below and make any necessary changes.

All literature orders will be shipped to the address that you enter below. This information can be edited at any time.

Current Literature Shipping Address

* Required field