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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:
    Hi, this is Jim Barnes. Great to be back with you once again. The FOMC met earlier today for another meeting here in in 2020. The last time they met the last time we were together was back on July 29th. And we weren’t real excited for today’s meeting for a couple reasons. The first is that, you know, towards the end of each quarter, the federal reserve, the FOMC will release their updated projections. They have a summary of economic projections that include GDP, the unemployment rate inflation, as well as the federal funds target range. And basically what that does is it compiles all the participants of the FOMC and what their projections are for those different variables for the economy for this year of 2021, 2022. And this time around, they actually added what their expectations, what the projections were going to be through 2023.

    Jim Barnes:
    So we were real excited just to get a feel for what is the fed seeing that far out on the, on the horizon. And the other thing that we were real excited to pay attention to was at the end of every FOMC meeting, they’ll always have a statement. And within that statement, they’ll basically lay out what they’re focused on. How do they see monetary policy, the path of monetary policy going forward. And this time around was very interesting, simply because since the last time we met, we did have a very important Jerome Powell, fed chairman, Jerome Powell speech in Jackson Hole, [Mississippi], back in August 27th, where he kind of laid out the Fed’s new views on inflation and how they were going to view inflation going forward. And what I mean by that in the past, you know, the federal reserve has always targeted as part of their dual objective.

    Jim Barnes:
    They’ve always targeted a 2 percent inflation rate, or I shouldn’t say always, but recently they’ve always targeted a 2 percent inflation rate, but there is much speculation that that may change simply because of, you know, how difficult it’s been for the re for the federal reserve to achieve that target. So in the past where they might’ve been preemptive in maybe tightening policy, if, as they were getting close to inflation, based on where they thought inflation could be at some point down a line, you know, given the fact that they were missing it so often there was a lot of anticipation that they might change the way they manage monetary policy, as it relates to inflation and inflation expectations going forward. So indeed that was the case. And so just to come out and say what they did, because it is very important instead of targeting inflation annual inflation at 2 percent, what they did is they said, you know what, we’re going to have more tolerance if inflation were to exceed 2 percent so that over a period of time, so long as inflation averages, 2 percent were okay.

    Jim Barnes:
    That if inflation goes above two percent to make up for some of the shortfalls that may occur, for example, during a recession. So that was real interesting to hear during a speech. And we wanted to see how that would be noted within their FOMC statement. Again, which came out today. Might as well just pick up on that point. So within the FOMC statement, the way it’s worded, it says that the target range for the federal funds rate will stay a zero to a quarter percent and it expects, it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment, and inflation has risen 2 percent, and as on track to moderately exceed 2 percent for some time. So that last piece of information I just mentioned, so that captures the fact that the federal reserve will have some tolerance for inflation going above 2 percent.

    Jim Barnes:
    So that’s real interesting for policy going forward, and I’ll get back to that in a minute, but now just shifting gears to the summary of economic projections that also came out today, again, really interesting in a sense that when you think about the participants of the FOMC, they’re a lot more optimistic for some of the data this time around relative to when they last did these projections back in June. So for example, when we think about GDP for this year in June, they were predicting it was going to be negative 6.5 percent for 2020. Now it’s projected still to be down, but only 3.7 percent. I shouldn’t use the word only 3.7 percent on a negative side is, you know, it was a big shortfall, but it’s not nearly as bad as at 6.5 percent that it had been projected back in June. The unemployment rate will drop to 7.6 percent relative to the 9.3 percent that was originally expected back in June.

    Jim Barnes:
    Inflation is supposed to be a little, a little bit higher for this year up at 1.2 percent compared to the point eight [percent] before. So I think overall, when you think about all those, those three different variables, definitely more upbeat this time around relative to where they were back in June, all three of the unemployment rate, inflation and GDP, as well as their inflation targets all seem to symbolized and indicate more optimism around just in general economic growth for this year. What’s interesting though, is that when you think about the federal funds target range, the federal funds target rate that the federal reserve it’s their main policy tool to conduct monetary policy, that’s expected to be roughly zero percent this year, zero percent next year, zero percent for 2022. And then for 2023, yes, zero percent very close to zero percent once again. So there is no expectations really for rates to move beyond their current zero percent.

    Jim Barnes:
    After the meeting, after we’ve read through the, the FOMC statement chairman Powell gets up there and he, he answers a number of questions from the press. The tone of his voice was very consistent as we’ve heard them in the past quarters. And in the past who FOMC statements, he wanted to somewhat downplay again in his dovish position, just what we’ve seen on the economic front. Like some of the economic data has been coming in better than expected. The labor markets are better right now than where they were obviously, you know, four or five months ago, but he wanted to taper that with there’s still a lot more work to be done in order to get the economy back to where the federal reserve wants it to be. And we always think back to that three-and-a-half percent unemployment rate that existed towards the end of last year, right before the COVID-19 hit back in March, but we’re still a far ways away.

    Jim Barnes:
    Again, we’re looking at seven-and-a-half percent unemployment rate at the end of this year. And so there’s work to be done. And he reiterated that, that over and over again. So I thought overall, the tone of his voice is very consistent with prior press conferences that he’s had, where he acknowledges we have work to do here. In regards to the market’s reaction. This I thought was kind of interesting. As the statement came out, the stocks we’re doing pretty good, bond yields were probably inching up a little bit, but by the time he was done with his comments with his press conference, we saw the, the equity market sell off somewhat. And we saw that the 10-year treasury the yield right now is right at a 70 basis points. So about two, three basis points higher than, than where we were before he started speaking.

    Jim Barnes:
    So everything is interesting. And I think when you think about the us treasury yields, the one thing that that I did think was kind of interesting he was asked a question about the quantitative easing (QE), right now the federal reserve is buying 120 billion worth of mostly treasuries, 80 billion treasuries, and 40 billion net purchases of agency MBS (mortgage backed securities) each month. And he was asked a question, do you foresee the fed, maybe extending out the yield curve with their purchases to try to get some, some more stimulus out there. He didn’t kind of bite in that. He said, well, we’re very comfortable with where policy is at the very moment. Of course, we’re always ready to alter it if, if things change, but for now we’re comfortable with where the current stance of accommodative monetary policy is. So I think that probably contributed to a little bit of an uptick and yields, as you know, maybe some demand that that might have been there in the longer part of the yield curve.

    Jim Barnes:
    At this point, there doesn’t seem to be much of a need, at least from the Fed’s perspective on their purchases. So I think there was some influence there. Just in general, when we talk about just inflation, and so the fed, you know, obviously they, they changed it, right views and just the overall framework on, you know, instead of targeting 2 percent and being more relaxed in terms of, you know, letting inflation run, you know, what does that mean for monetary policy? Doesn’t really mean much today. I mean, there are going to be policies, very accommodative right now, and we know it’s going to be, you know, accommodative this year, next year in a year after. Probably where that north of 2 percent inflation rate comes into play, you probably need to see more improvements within the labor market to get that unemployment rate down lower and wanting to get some, some wage inflation growing there, so it can filter into to consumer prices.

    Jim Barnes:
    So we’re probably not seeing any real change in policy being influenced by their change in inflation, at least for probably the next two, three years, but it is something is, it was interesting. And something to just kind of, to monitor now, going forward, just to see if some of these statistics on these variables that the fed pays attention to, you know, how quickly some of them are able to you know, kind of get back to to where we were in the earlier part of this year. You know, obviously based on the fed perspective and you know, that funnels through into their projections, it’s going to take some time. So with that being said, I always enjoy talking to you. If you have any questions at all, please feel free to, to visit us at bmt dot com. 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 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.