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Podcast: January 27, 2021 – FOMC Meeting Recap

Jim Barnes, Senior Vice President and Director of Fixed Income at BMT Wealth Management, discusses the first Federal Open Market Committee (FOMC) meeting of 2021 that concluded on January 27.  As expected, the Federal Reserve (Fed) left monetary policy unchanged but acknowledged recent economic weakness in the post-FOMC statement.  Fed Chairman Powell played down the likelihood of removing current monetary policy accommodations in 2021 by simply stating the discussion was premature given the economic uncertainty related to the pandemic.

Transcript

Introduction:

Welcome to the Bryn Mawr Trust Wealth Management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome today’s host Jim Barnes, director of fixed income at BMT Wealth Management.

Jim Barnes:

Great to be back with you once again and very excited that we’re here to talk about the federal open market committee, the Federal Reserve for its first meeting of 2021. You know, very glad to see a 2020 behind us given all the different events that that had occurred. And we know that in 2020, the Federal Reserve was, was very active with their monetary policy. Their various ways to try to stimulate economic growth their various ways to try to bring stability to the financial markets that I thought before getting into today’s meeting it, it probably was appropriate just to kind of set the set the stage basically where policy is today. So what, what were some of the things that happened in 2021 in terms of the tools that the fed had relied on and referred to when conducting their, their monetary policy. And, and I guess the first thing to notice that their, their main policy tool, the federal funds target rate that right now is, is basically pinned to zero. It’s on it’s in the range, so it’s right now between zero and 25 basis points. Their balance sheet, that back in February, 2020 was roughly a, at that point was at roughly a $4 trillion that has jumped up to the size of a little bit North of of $7 trillion. That’s an additional, a $3 trillion worth of of securities, mostly a U.S. Treasuries and agency mortgage backed securities. We know that the Federal Reserve had incorporated and implemented a number of different facilities and programs to try to promote stability within a, within a lending markets within the financial system. Many of those programs have, have gone away or expected to, to expire at the end of the first quarter, but we know that those facilities were very helpful in in stabilizing different sectors within the lending markets, such as the municipal sector, corporate bonds, commercial paper, asset, backed securities, things of things of that nature.

Jim Barnes:

And we also know that the fed didn’t just stop there. They also they said to us that, hey, we’re gonna, not only do we have rates at 0% today, but we’re going to keep them at 0% at least until the end of 2000 to the end of 2023. And we’re going to continue to buy bonds, both U.S. Treasury and agency mortgage backed securities on a monthly basis of at least $120 billion, at least until they see substantial progress within their and achieving their, their dual mandate – price, stability and maximum employment. So, so a lot of a lot of policy was, was put in place in 2020, and it just basically set the stage to a very, very accommodative monetary policy environment here in 2021. So when we go to today’s statement and the feds two day meeting that, that was completed earlier you know, really no change at all within any of those areas, policy is going to remain accommodative

Jim Barnes:

You know, not, not only is it the, did they not make any changes, but they didn’t hint at any changes coming up in in the near future. So that’s important to note, you know, the was, within their statement, some minor modifications. And basically all they were doing is simply just acknowledging that some of the economic data within a fourth quarter has been decelerating and they, they focused the way they word it was simply you know, areas that are probably more exposed to the pandemic the service sector. We know we’ve seen a decline in the labor markets and and we’ve also seen a deceleration of of consumer spending. And that makes sense, given the, the increase in lockdowns that that started to occur towards the latter part of 2020, as COVID-19 cases started to increase around around a U.S. And obviously more prevalent in, in specific areas.

Jim Barnes:

And now going to the post press conference from the chairman of the Federal Reserve, Jay Powell, you know, that was really interesting, you know, one of the things that you know, that he talked about in different parts within his comments were bubbles that you know, a lot of the questionnaires were asking. Is there a bubble in the housing market? Is there a bubble, you know, given how tight credit spreads are, is there a bubble within the corporate bond market? Is there, is there a bubble on the equity side, we’ve seen equity markets continuing to go higher and higher. And we know that certain certain companies have been experiencing a lot of price volatility when you look at the movements during during a specific day. And so just to take those one at a time on the housing market side, he wasn’t too concerned.

Jim Barnes:

He thought that you know, we have seen a lot of demand and, and mostly because people are working from home that maybe they want a bigger house or, you know, additional house or something like that. And he thought that that type of demand will, will probably settle down. As we head into 2021 and 2022. On the, on the corporate bond market side, he thought that the tight credit spreads were a positive. It just showed the amount of confidence out there within a market participants. So he didn’t view that as a, as a negative at all. And then on on the equity side, he was asked specifically in regards to the pricing activity of GameStop, which has gotten a lot of a lot of attention. And he basically just said, Hey, listen, you know, we have, we have tools here.

Jim Barnes:

We have monetary policy tools, and they’re not really used to try to interfere with, with those types of pricing. You know, the, the monetary policy tools are better used for their dual objective of the you know, promoting stability within the labor markets, price, stability. And and that’s what they’re focused in. They’re not, they’re not focusing on the day-to-day activities within the financial markets in terms of trying to use monetary policy as a way to control potential bubbles, that mostly they have other types of tools that they would use. So even though they’re monitoring those markets, they’re not looking to monetary policy as a means to, to try to control any type of any type of pricing behavior. I thought that the fed was, I thought he was optimistic in regards to economic growth for 2021, mostly in the second half of 2021.

Jim Barnes:

He just talked about the very benign backdrop, when you think about where monetary policy is fiscal policy in the amount of stimulus that was put in place in the first half of 2020, as well as, as we ended last year, we got that additional $900 billion in, in the second stimulus package at least in regards to the size. And then we know that the, you know, Congress is right now actively discussing another potential stimulus package, which could be anywhere, at least based on you know, what expectations are from a $trillion to $2 trillion. So we’ll have to see where that, where that ends up, but, but when you take that all together and you also combine that with vaccine distribution, there were pretty optimistic in regards to economic growth for 2021. And, and and optimistic that a lot of these sectors within the U.S. Economy will begin to reopen and you know, actually see some economic growth, some of the service sectors areas that have been the most exposed to the coronavirus. All of that look do, you know, sounded very, very positive.

Jim Barnes:

He said, there’s a lot of uncertainty around that outlook, obviously, depending on how the vaccine distribution is able to roll out, you might get a hiccup here or there, but generally speaking the team pretty good with that being said, you know, and at this point I want to stress, there was no indication that the Federal Reserve is thinking about it all withdrawn, any of that, any of that policy, the labor market, he said, there’s a couple of times during his comments that there’s still nine, 10 million people that are unemployed at this point. And he was referring to not just the people that are part of that, that 6.7% unemployment rate that was captured at the end of December. But if you throw in the millions of workers that have left the labor force, you get an unemployment rate that’s closer to around a 10% or so.

Jim Barnes:

You know, that’s, that’s their focus and, and, and there’s a lot of work. It said it’s gonna take a lot of time. You know, a lot of economic growth before that labor market looks the way it did back in February of 2020. On the inflationary front, there’s no concerns there at all. He did say that you know, it’s definitely possible [that] you’re going to see inflation in 2021 starts to tick up mostly because of demand, supply type mismatches. And and it’s only because you have with all the fiscal stimulus dollars that are out there. I mean, you, you should see some, some price pressures start to start to pick up. But he, he stopped short of saying that you know, that’s, that’s a major concern of anything. He, I believe he did use the phrase, you know, that would be, you know, somewhat welcomed on their front.

Jim Barnes:

They, they continue to be focused in, on the, the long-term sustainable of inflation. And they continue to be focusing on you know, some of these areas such as, and we’ve talked about before, but just what we’ve seen with globalization and technology and aging of the labor force what’s been happening in, in some of the developed markets on the inflationary front, or I should say the deflationary front to some extent. And that’s really where their concerns are. Then they’re not concerned about if if prices start to tick up and it mostly has to do it because they have the tools to combat inflation. They’re not concerned at that, but when your set with policy rates at 0%, deflation still becomes a major, a major issue in their minds. And they’re going to do what they’re going to do, whatever they can to try to make sure that inflation’s on the, on the right track. And the last thing they want to do is pull that, pull any type of kind of policy away too soon.

Jim Barnes:

So I thought that was definitely a key takeaway here, you know, for us and that you know, when the market starts pushing bond yields up, you know, higher anticipation of maybe some tapering, a bond purchased by the fed, you know, we would say that the Federal Reserve will be very quick to probably step in there. If it interest rates of yields get to become too high, where it starts to prohibit economic growth. And again, it just goes back to what I was saying before inflation at this point, it’s just, it’s, it’s far, far, far away from being a concern of the, of the fed. So I had the markets react to this. Well, if I look at it 10 year, U.S. Treasury note, it didn’t change that much at all. It’s right now about 1% or so, maybe a little bit above that.

Jim Barnes:

And that’s basically where it was before you know, before the statement was, was released. So there really wasn’t much change at all with, with bond yields. And then from two o’clock on the, the, the equity markets, at least looking at the S&P 500, that started to tread water a little bit. You did see that starting to the, the market there started to sell. I, I don’t know if I would say that was specific to any comments from the Federal Reserve, but nevertheless, that was the trend, and the S&P [500] actually ended down on the day, roughly two and a half percent. Taking it all together, I thought the outlook was very rosy. I think for 2021, it looks, it looks good, but I, I would stay that the, the quick takeaway here is don’t look for any adjustment to policy, any adjustment for, for any tightening type policy in in 2021.

Jim Barnes:

And obviously I’m not talking about you know, on a target rate, because I think that’s pretty well understood that thing’s going to stay at 0% through 2021 and through 2023. And you know, based on our views, when we think about their asset purchases, the market’s always looking for more direction on what are they going to do with their, with their bond purchases. We would not think that those that, that you would see any type of tapering in 2021, you know, so, so for the next 12 months that we’ve probably stopped short of seeing any tapering. And he was very adamant to, Powell, that press conference saying that they would well telegraph any change in policy there. And he would, and they would communicate that many, many months in advance. So overall, I thought it was good meeting. I thought it was somewhat of a positive meeting. Although we, again, don’t expect any changes to policy, at least for a, for 2021, the big ones, at least not in a tightening side. And we’ll have to see, and hopefully everything from economic growth pans out as they expect, that would be a positive obviously for, for the U.S. Economy. so that’s it for today. Glad to be here, reporting to you. If you have any questions, please visit us at www dot bmt dot com. This is Jim Barnes, director of fixed income, here at Braemar trust. Thank you very much.

Closing:

This has been a production of Bryn Mawr Trust. Copyright 2021. Visit us online at bmt dot com forward slash wealth. The views expressed herein are those of Bryn Mawr Trust as of the date recorded and are subject to change without notice. Guest opinions are their own and may differ from those of Bryn Mawr Trust and its affiliates and subsidiaries. This podcast is for informational purposes only and should not be construed as a recommendation for any product or service. BMT Wealth Management provides products and services through Bryn Mawr Bank Corporation and its various affiliates and subsidiaries, which do not provide legal, tax, or accounting advice. Please consult your legal, tax, or accounting advisors to determine how this information may apply to your own situation. Investments and insurance products are not bank deposits, are not FDIC insured, are not backed by any bank or government guarantee, and may lose value. Past performance is no guarantee of future results. Insurance products not available in all States. Any third party trademarks and products or services related thereto mentioned in this podcast are for discussion purposes only. Third party trademarks mentioned in this podcast are not commercially related to or affiliated in any way with BMT products or services. Third party trademarks mentioned in this podcast are not endorsed by BMT in any way. BMT may have agreements in place with third party trademark owners that would render this trademark disclaimer not relevant.