Searching for your nearest BMT.

Podcast: March 17, 2021 – FOMC Meeting Recap

Jim Barnes, Senior Vice President and Director of Fixed Income at BMT Wealth Management, discusses the Federal Open Market Committee held on March 16/17. The quick takeaway, the Federal Reserve (Fed) is in no hurry to remove or alter its accommodative monetary policy this year. The Fed continues to project the federal funds target rate will remain near 0.00% through 2023 based on the recently updated Summary of Economic Projections. During the post-meeting conference, Fed Chairman Powell acknowledged the recent rise in bond yields but didn’t believe there was a need to alter the amount of monthly bond purchases.

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:

Hi, this is Jim Barnes director of fixed income here at Bryn Mawr Trust. So great to be back with you once again, to talk to you about the, I guess the second FOMC meeting here in, in 2021. And with this meeting, there was just I mean, so many interesting things have happened. So far in, in, in 2021 that you know, there was a lot of interest for this FOMC meeting to get a feel for how the fed and how the, how chairman Powell would would react to some of these recent events. And what I’m referring to is that it just seems as if overall a number of firms out there have been upgrading their economic forecast for 2021. And that makes a lot of sense. When you think about the vaccine distribution, that seems to be coming along much better than had been, had been anticipated.

Jim Barnes:

I mean, that’s a big positive, just if you think about the U.S. Economy, being able to reopen a little quick, a little sooner and get individuals and households back to back to their pre-COVID you know, everyday daily activities. So that was a nice, that’s a nice boost. The economic data, I would say so far here in the, in the first quarter is holding up better than it had been anticipated. The big jump up in in COVID cases has definitely tapered off. So that’s, that’s been a huge positive and probably the biggest news, the most exciting news is on the fiscal front. We know that we ended 2020 with roughly with the roughly $900 billion fiscal package that included just a number of different areas of, of consumer spending support, whether it be through a direct checks or unemployment benefits.

Jim Barnes:

But now we know that in the early part of, of March we just got another $1.9 trillion fiscal plan referred to as the American rescue package or would the American Rescue Plan. And that’s going to add just and contribute to just tremendous amounts of economic growth here in, in 2021. So there’s just been a lot of hype for how’s the fed going to interpret all this new information. What’s the fed going to view all this stuff and, and its impact on economic growth. And at the end of the day, how is it going to alter you know, the Fed’s view on monetary policy is this enough to alter policy, maybe not today, but at some point a future does this maybe push up, maybe the first rate hike, or does it alter you know, their expectations for when they might begin reducing the size of their balance sheet or tapering for that, for that matter.

Jim Barnes:

And what made this meeting so much more fun and exciting is that you know, four times a year, we have this summary of economic projections where the participants of the, of the Federal Reserve, the FOMC, I should say the participants of the FOMC will provide their projections for different economics statistics. So the unemployment rate, inflation, economic growth and real GDP and then also what the, what their projections are for the federal funds target rate through this year, next year, all the way through 2023. And so that was the timing on this is fantastic because we’ll get a, a real look as to, you know, based on what we’ve seen, all those events I just mentioned earlier. How is that going to alter the Fed’s projections, the participants of the FMCs projections? I know all these different variables. So heading into this you know, some of the things that that we were looking at pre FOMC pre FOMC meeting here on on March 17th, probably the biggest had to do with the, with the target rate.

Jim Barnes:

We know that the last time the summary of economic projections came out back in December of 2020, you know, participants didn’t see a change in the, in the federal funds target rate through 2023. So that basically meant that your short-term rates were going to stay at 0%, roughly all the way through, through 2023. So we’re real interested to see how the, if there was going to be any changes there. The other piece that we thought was going to be real interesting is that, you know, we have seen bond yields jump up quite a bit so far in 2021, and that makes sense as growth expectations have been revised higher. You know, we have seen a readjustment of bond yields and the, and the readjustment has been pretty, pretty substantial in our view. We started the year with the 10-Year of roughly 90 basis points.

Jim Barnes:

That’s a 10-year treasury note. So our, the year, roughly 90 basis points. And as I look now at we’re trading around in, in the one-sixties and the 1.6%, so that’s a pretty significant jump up in a, in a two-and-a-half-month timeframe. And so we are, we were kind of interested to hear from chairman Powell to see if if those higher rates is that a negative to the financial conditions, it to some extent and how would they, how does the fed view those higher rates in the context of economic growth and in the context of monetary policy in general? So that being said, so let’s just, let’s just cut to the chase and you know, here we are now at that at two o’clock the FOMC the statement comes out. And, and what did we see?

Jim Barnes:

Well, interestingly, we saw that the dot plot, the Federal Reserve, the participants of the fed their projections for federal funds target rate remained at 0% through 2023. Now you did have a number of individuals that push forward their expectations for the first rate hike. But at the end of the day, it just, it wasn’t enough to move that meeting and forecasts away from that 0%. So that’s, so that’s really key. So for now, the fed continues to believe that that, that first rate hike is going to come no sooner then then 2023, I would say that when you look at all these other economic data points, like everything was revised in a positive direction. So so, so economic growth, the fed expecting a growth for 2021 to be at six and a half percent. So that’s, that was revised much hire.

Jim Barnes:

The unemployment rate was expected to fall up to four and a half percent. So there were some improvement there. On the inflation front, this was really interesting. Inflation jumps up to 2.4% in in 2021. That is just really interesting because obviously that’s, that’s probably the, the highest forecast that is that I can remember seeing in these, within any summary of economic rejection. And it’s obviously I would say, you know, modestly above that, that 2%, that 2% more so, and then in regards to the balance sheet, the federal reserve, they they’re, they’re making no changes to their balance sheet, the balance sheet, they’re going to continue to purchase a hundred billion dollars, the mix of treasuries and agency mortgage backed securities. So no change there. So now just fast forwarding to the, to the press conference. So that, so the information so far from the meeting is, is very exciting and it’s very compelling in terms of just the explanatory information we’ve gotten, especially though that target rates thing, it’s 0% through 2023.

Jim Barnes:

I mean, that piece is very interesting and, and, and it’s, it was a big answer to one of the markets and to our question as to how the fed was going to account for all this positive economic outlook in 2021, as it relates to their policy. So now, as we turn to the press conference, the press conference is, was going to be really interesting because we want to learn more about inflation. We want to learn more about the labor market, you know, how’s the fed viewing this higher yield. I mean, these are going to be specific questions from the participants in the in the audience, more or less from, from the press. And this is a time where they can be very specific with their questions and delve in a little deeper to some of the recent info that we, that we just received.

Jim Barnes:

The press conference is about an hour and a half long. And, you know, this was some of the key takeaways here that, that I thought were, was definitely worth sharing. The first was on the inflation front. So I mentioned before that inflation was forecasted for 2021 at 2.4, 2.4%, but the fed is not concerned at all. And and what’s interesting about that. It’s forecasted to be 2.4%, but in 2022 – so the following year – it’s actually expected to go down to 2%. So pretty big jump and chairman Powell listened to him speak. He said, for, for this year, you are going to to get a jump-up in inflation simply because you’re starting from a low base last year, which makes sense. And then also as the economy reopens, you know, you’re undoubtedly going have some, some, some demand-supply imbalances, that may cause some, some short term spikes in inflation, but it’s not expected to be a, it’s not expected to be sustainable.

Jim Barnes:

So even though they have a, you know, a high anticipation for inflation this year was the taper off. So in their views, they don’t seem to be concerned at all. On the labor market front. Yeah, the fed acknowledged, we did make some improvements to our unemployment rate of four and a half percent. That is a positive. However, you have to keep in mind that we are looking at a number of different what types of labor market statistics, the employment rate is just one. And I tell you what, the one thing that he did that he consistently has been focusing on the last few meetings is the number of individuals that are, that are the fewer number of people that are employed today relative to pre-COVID-19. At this meeting, he said there was roughly nine and a half million that are, you know, the fewer individuals employed relative to February of 2020.

Jim Barnes:

Now that’s come down from 10 million, but at the end of the day, it’s a huge, huge number that the fed continues to obviously be focused on. And and although the economy improving, you can see that in a data and you can see that in the projections. I think the Fed’s overall viewpoint on this is that you need some consistency. See, you need some duration in terms of how long the economy is going to be doing well in order to get that nine and a half million back to work back to where they were back to February, 2020. On the higher yield front, with yields up around 160, 165 (basis points), somewhere in that range. There’s like, like I talked to you, like I mentioned before you know, is that potentially referring to, does that mean that that financial conditions might be tightening?

Jim Barnes:

I, chairman Powell said listen, you know, based on we’re comfortable with where yields are right now, you know, maybe we definitely paid attention to how quickly yield said had jumped up, but given where they are now, we still see no reason to alter the, the pace of our monthly bond purchases, meaning that they see no reason to increase the size from, from 120 or decrease the size 120, $120 billion seems to be the right number based on you know, what they see within the current and economic growth. And so no, so no changes there. And he actually, she went into some detail about tightening financial conditions and he got a little more specific and he was saying, you know, there’s a number of metrics that we look for for financial additions. And he talked about, about household borrowing and that the, the household from a balance sheet standpoint is in such a healthy position today relative to, well, maybe if you were to compare it to the financial prices, that’s a huge positive.

Jim Barnes:

He acknowledged that yeah, businesses happen you know, are sitting on debt, but they also have a lot of cash on their balance sheet and a lot of them had extended out there the maturity. So you have the liquidity. So they’re not ultimately concerned and concerned about the debt with corporations either. And from a funding standpoint, they haven’t seen anything in the funding markets, in the capital markets that are, that are concerning to them. At this point, they did discuss it. There was one thing that they did mention that they do feel somewhat elevated, and that’s just asset pricing by various metrics. Asset prices in certain sectors of the economy do seem to be on the, on the higher side, but he also tempered that back by saying it, but he just didn’t come across as, as overly concerned. I would say that the overall meeting this meeting that followed the one in January, the consistency of the dovishness of the fed definitely continued.

Jim Barnes:

What was interesting was that the U.S. Equity markets all headed into the, to two o’clock FOMC statement in negative territory. They were all down. So that’s the Russell 2000, a Dow Jones S&P 500, the NASDAQ, they were all heading. They were all lower heading into that two o’clock FOMC statement. And each one, all four of those actually ended the day higher. So I think that kind of speaks to that that dovish, this, that that was you know, well-received by, by market participants on the bond side, within fixed income. Interesting. short-term short-term maturities. So yields went a little bit lower, longer term. The yields actually went a little bit higher. So overall you had a, you had a steeper yield curve, and that kind of makes sense, too, if you think about the fact that there was really no significant changes to the Fed’s outlook for, for rate hikes, they didn’t alter course at all in terms of what the projections are there.

Jim Barnes:

And then there was no changes to, and no concerns, at least at this point to having to step into the market, to prevent longer-term yields from, from continuing to rise. So a steeper yield curve, given those two pieces of information to us makes, makes a lot of sense. So overall, what’s, what’s our take on this. The fed is in no hurry to remove accommodative monetary policy. We’ve said that before, we’re going to say it again. We believe the fed when they project out rates at 0% through 2023, when we look at the summary of economic projections, you know, there’s no reason to us at this point that says that that they’re going to jump the gun. They continue to be focused on a sustainable inflation rate. They’re comfortable having inflation above 2% for a period of time. They want the labor market, they want that nine and a half million to get back in their back working again. All that stuff takes time. And it’s just, when you put it all together, there’s just no reason to to have to jump the gun on removing any accommodative policy. It just doesn’t seem to be doing any harm. And on the contrary, it seemed as if that accommodative policy, especially with the, with the support and assistance on the fiscal, seems to be doing some good benefits to to the U.S. Economy. So with that being said once again, always enjoy I always enjoy speaking to you. The next meeting will be on April 28th and and look forward to catching up with you then. So once again, this is Jim Barnes director of fixed income here at Bryn Mawr Trust. If you have any questions, always feel free to visit us at bmt dot com. Thank you very much.

Introduction:

This has been a production of Bryn Mawr Trust. Copyright 2021. Visit us online at bmt.com/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.

Jim Barnes, Senior Vice President and Director of Fixed Income at BMT Wealth Management, discusses the Federal Open Market Committee held on March 16/17. The quick takeaway, the Federal Reserve (Fed) is in no hurry to remove or alter its accommodative monetary policy this year. The Fed continues to project the federal funds target rate will remain near 0.00% through 2023 based on the recently updated Summary of Economic Projections. During the post-meeting conference, Fed Chairman Powell acknowledged the recent rise in bond yields but didn’t believe there was a need to alter the amount of monthly bond purchases.