Market Minute - September 15, 2020

The Federal Reserve of Kansas City held its annual Economic Policy Symposium in late August with the theme of “Navigating the Decade Ahead: Implications for Monetary Policy”.  This event is typically held in Jackson Hole, Wyoming but like so many events this year, it was done virtually.  The Federal Reserve has been reviewing its monetary policy framework for over a year now and Chairman Powell discussed some changes during the event that I would like to highlight.

The central bank has a dual mandate from Congress to set monetary policy to support full employment and maintain price stability (inflation).  The Fed set a target inflation rate of two percent in 2012 and have had a difficult time reaching their goal.  Chairman Powell addressed this situation by adjusting their strategy to achieve an average inflation rate of two percent over time.  This will allow for an overshoot of inflation to make up for the previous shortfall.  Powell also stated that a strong labor market can be sustained without causing an increase in inflation.  Historically, when unemployment was low, the Fed would start raising rates to combat potential inflation although this dynamic has not been present for some time. These announcements did not surprise the market as Powell has commented previously that their target was symmetric. In a news conference in July, Powell stated, “We are not even thinking about thinking about thinking about raising rates.”  The change in view on inflation will most likely mean lower interest rates for some time and will have implications for investors.  This also leads to the question of unintended consequences of these policies.  Low interest rates can lead to speculative activity which we have seen in certain areas of the market.

Those seeking income from their portfolio will have to adjust their expectations and look for pockets of opportunity.  The benchmark 10-year Treasury bond is yielding close to .70% and most other bonds take their cue from Treasuries bringing yields down across the fixed income market.  In August, a company rated below investment grade by the ratings agencies, issued 10-year debt with a yield below 3% which is the lowest on record for that maturity.  When seeking income from a portfolio, it is often risky to seek out those investments with the highest yield.  Maintaining balance in a portfolio is important, especially as we head into a potentially volatile election this fall.               


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