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  • Transcript


    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:

    So great to be back to once again. I think the last time we were together was back on April 29th and a lot has happened since then. So I thought the best way to start before we get into what happened at today’s FOMC meeting is to just do a quick recap. The last time we had talked, we had gone over just a number of facilities and programs and actions by the federal reserve in response to, you know, what we’ve been seeing from an economic growth standpoint, as it related to COVID-19, the big drop that we’ve seen in economic growth, the deterioration within both inflation as well as the labor market. And as we discussed the last time, we know that the fed has implemented just a number of programs and facilities, interest rate actions to try to do what they can to both prop up and bring stability to the lending markets.

    Jim Barnes:

    And at the same time, try to stabilize economic growth to some extent, and as we continue to move forward, hopefully we can turn the corner on economic growth and, and move away from economic contraction and into positive economic territory. So we know that right now, the federal reserve had dropped the federal funds target range all the way down to 0%. So the target range right now is between 0% and 25 basis points. The federal reserve and introduced a number of facilities to prop up the lending markets. And at that point, mostly they were announced facilities, but you know, very few of them had actually been put into motion. And we’ll talk a little bit about that in a second. And then we also know that from then till now they ramped up their bond purchases to the extent where the balance sheet was at four point $2 trillion back in mid-March.

    Jim Barnes:

    And right now, when I look at the balance sheet, it’s over $7 trillion. So in that time period, the fed has been very active and busy buying both us treasury securities, as well as eye agency mortgage backed securities. So the fed has obviously done a lot so far, but it’s interesting because as we were looking forward to today’s meeting, you know, we still were thinking that the fed was going to potentially do more, or at least give us some, some additional insight as to what they’re seeing. What’s their expectations for growth in the labor market and inflation, how do they see monetary policy playing out, but the rest of this year and 2021 and so forth. And what makes today’s meeting so interesting is that every quarter, typically the federal reserve will release their summary of economic projections, but they didn’t do it back in March when, typically for there, which would be normally their routine time to release their projections.

    Jim Barnes:

    They didn’t do it simply because everything was in such disarray and it would be so difficult to, to make any types of assumptions, projections in regards to where unemployment is going to be or economic growth is going to be this year and next year that they didn’t release anything at that time. But here we are in June and they provided their projections. And so we’ll, we’ll talk about that a little bit as well. So just great getting into it for, so for today, no surprise, they left the target range unchanged at zero to 25 basis points. Within that summary of economic projections, it was interesting that the majority of the participants, they see they project that that target range will stay at today’s very low level all the way through the end of 2022. So that’s for another two and a half years.

    Jim Barnes:

    That’s a pretty long time period. And that’s based on what they’re projecting today. And, and you know, they also give their projections for the labor market and inflation. And as we know, as each meeting concludes chairman Powell, Jerome Powell, he’s there ready to go to answer questions from the press. And I will say that we thought that chairman Powell came across as, as, as very dovish. You know, when you think about the federal reserves, dual, their dual mandate, their dual objective, you know, when they try to promote full employment and price stability, he focused mostly on just the labor market. And you can tell that, you know, when you’re coming from an environment where you were sitting at the unemployment rate of three-and-a-half percent, and then all of a sudden it shoots up to where it is today, which is a little North of a 13% in a span of two, three months.

    Jim Barnes:

    I mean, that is such a, such a big gap between the two you go from, you know, record low unemployment to now, to some extent you have an unemployment, that’s three percentage points higher than at its worst during the great financial recession. And so it was, it’s just various relative to here, the federal reserve talk about it. So they spent a lot of time talking about the labor market and their expectations that it’s going to take some time. It’s going to take some time in order to get people back to work. We should continue to see some gradual improvement there. People reentering the labor force, the unemployment rate coming down, but it’s not gonna happen overnight. And they’re focused on a labor market here when Chairman Powell got some questions about inflation, and they’re not concerned about inflation at all. Which is interesting simply because the market sees all the fiscal stimulus, they see all the stimulus coming from monetary policy, and they think, you know, at some point inflation might poke its head again. But Chairman Powell said, fine, let it flow to the surface. We’re not at this point where we’re definitely not concerned with inflation. And then he referred back to prior years where they’ve just had a difficult time trying to get inflation back up towards 2%. And he even made the comment that to get some inflation would actually be, at this point, welcomed. And once again, if they were to surpass 2%, that certainly would not be the end of the world. What they’re focused in on at this point is simply just the labor market and trying to get that unemployment rate down as best they can into trying to actually get a pickup and wage growth as well. A couple of other numbers I want to throw out there to you is the FOMCs projections for the unemployment rate at the end of 2022 stood at 5.5%.

    Jim Barnes:

    So that’s at the end of 2022. So two-and-a-half years from now, they’re still projecting a great number of five and a half percent. And you know, that number is very interesting. When you think about how many times we’ve heard the fence say, you know, we’ve already done a lot in terms of actions that we’ve taken to try to support the economy and support the lending markets. However, don’t be fooled to think that we can’t do more because we, we certainly can and we’re here ready to do more of we think that the economy and the lending markets need it. If they have a projection of, of five-and-a-half percent at the end of 2022, and you have this soft commitment from the fed that they’re ready to do, and take action, and do whatever they can to try to get things up to where they should be. It does open the door to actions down the road. And it was every reiteration of comments, such as that, that I do think that the fed does come across as being dovish, does lead to yields being lower across the curve. And just something to pay attention to going forward. And just getting into some of the market’s reaction that the stock market was down, maybe about 50 basis points or so when I look at the S&P 500,uso the S&P 500 dropped about a half a percentage point, the 10-year note, the 10-year U.S. Treasury yield, dropped all the way down to right now about 72 basis points. Now that got as high as 90 basis points on Friday when we had that really robust, labor market report, that surprised markets, but what the bond market now is looking at, you know, we talked about the different types of tools that the fed has at its disposal.

    Jim Barnes:

    And we talk about quantitative easing. We talk about low interest rates. Forward guidance is a very powerful tool that the fed has at its disposal to try to influence the yield curve. And the way it does that: It wants investors to know that here the fed is they’re committed to, to a low federal funds target range, not just today, but through the end of 2022. Because that’s going to influence, that’s going to influence yields across the yield curve. It’s nothing going to, and it will definitely influence your short term yields. But then as that forward guidance, as that soft commitment of what they’re projecting, they’re going to do as they extend that out one year, and then now to two years and in two-and-a-half years, and then potentially even farther than that, it starts to impact more longer parts of the, of the yield curve.

    Jim Barnes:

    So the 10-year investors today, they hear what the chairman is saying. They see that. They traded on that. And now we’re sitting at a 10-year U.S. Treasury yield at 72 basis points, or so. Now what I would pay attention to going forward. Some other tools they have not utilized, but it’s interesting because they talked about it, was yield curve management. Yield curve management has to do with maybe focusing on a specific part of the yield curve and, and focusing on a yield that you want for that specific maturity. So the best example is Japan has been doing that. They’ve been focusing on a 10-year Japanese government bond at 0%. And they will buy and sell their purchases to try to achieve a 10-year Japanese bond around 0%. So that is also something that, you know, is on the table. I think for for policy, they, they, there’s no promises that they might lean to that, but it was kind of interesting that he, that the fed did bring it up today, that they discussed it, you know, no actions at this point.

    Jim Barnes:

    But I think the fed is trying to, to let the marketplace know, they’re trying to let investors know that, listen, we have stuff in our toolbox here. We have things tools that we can pull out if need be to continue to promote and achieve our objectives, which once again, is that full employment and price stability. I thought today’s meeting was very insightful and a, you know, a lot of new information, the summary of projections was a lot of fun to take a look at. I’ll say just real quickly in summary, it was just, you know, they’re focused on a labor market seems to be the top priority. Inflation, not so much. There’s no concerns there. The fed is ready to do what they can to make sure that they achieve their objectives. That last thing I’m going to mention, and I thought this was really interesting.

    Jim Barnes:

    Chairman Jay Powell did get a question towards the end about what the run up that we’ve seen within the equity markets and asset prices. Has it come too far? Are you concerned about asset bubbles in that regards price bubbles there? And chairman Powell was very straightforward. He said, listen, we have a dual mandate here. It’s already said it two, three times. I’m going to say it again. Our dual mandate is price stability and full employment. We are not out there trying to control what happens within the equity markets at this point. They’re focusing on that labor market. They got to get that unemployment rate down. The likelihood of them getting it back to three-and-a-half percent overnight obviously is not going to happen, but they just seem so determined to do what they can to go ahead and promote that labor market, get that labor market to where it needs to be. And they have the tools, at least based on what they’ve said, in order to keep things going in the right direction. So I’ll stop there. As always, if you have any questions at all, please feel free to visit us at And as always great to be here. And this is Jim Barnes, director of fixed income. Thank you very much.


    This has been a production of Bryn Mawr Trust. Copyright 2020. Visit us online at forward slash wealth. The views expressed here in 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 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.