Fed Chairman Jerome Powell

"We're not even thinking about raising rates."

June 15, 2020

Photo: Federal Reserve Chairman Jerome Powell holds a virtual press conference following the Federal Open Market Committee Policy meeting last week. REUTERS/Kevin Lamarque

Michael ListBy Michael List, CFP®
Portfolio Manager

Last week the Federal Reserve held its regular meeting to reevaluate economic conditions and interest rates. After the Fed's statement and virtual press conference with Chairman Jerome Powell, the equity market experienced its worst day since March — some described it as the market “taking a breather.” 

It makes you wonder, what exactly did the Fed say? Moreover, can the market just go back to holding its breath?

What the Fed said:

Upon review, the Fed didn't say anything particularly shocking last week. The coronavirus outbreak has had a tremendous impact on the United States and countries around the globe. Financial conditions have improved recently, a result of significant stimulus measures and the reopening of businesses as quarantine measures are relaxed.

However, the Fed recognizes that a full recovery is still going to take some time, and plans to keep interest rates low for a while. “We're not even thinking about raising interest rates,” Powell said during the conference. “We're not even thinking about thinking about raising rates.”

As you can see from the Fed’s Dot Plot chart below, most of the voting members expect rates to remain at zero until at least 2022:

Chart: The Fed's Dot Plot

Some people viewed the Fed’s recent comments as the final blow to hope for a quick ‘V’ shape recovery. To be fair, we are in uncharted territory. Economists do not have a large dataset to compare the shock from a global pandemic, nor the largest fiscal and monetary stimulus response in history.  However, today we live in a high-speed world increasingly ruled by data.

In the example below, tracking “Retail & Recreation” activity, we see different rates of recovery emerging based on state lockdown policy. States that did not issue stay-at-home orders have mostly recovered, while states just beginning to reopen or reopening regionally have improved, but remain well below last year's activity. At this stage, the Fed has decided, if it is going to make a mistake in policy, it will err on the side of caution. The Fed would rather risk higher inflation than a more severe recession.

Chart: U.S. State Retail & Recreation Activity Based on Reopening Status

What does it mean for you?

The market “taking a breather” is common and healthy, though it can be uncomfortable. The market has historically experienced declines of 5 percent or more an average of 3 times a year. These dips are often technical (short term) rather than structural (long term). After the $2 trillion stimulus passed and quarantine measures were relaxed, the S&P 500 posted its best 50-day return in decades. Often after the market bursts higher, investors pause for a period of time and review consensus assumptions. During these periods, volatility typically increases. 

Chart S&P 500 50-Day Price Range (since 1952)

The market will likely be “taking a breather” over the next few months. Daily trading volume is often lighter during the summer as many families take vacations. Volatility will be higher as investors digest and analyze the latest data in consumer spending, coronavirus cases and employment changes.

The Fed has reiterated its commitment to remain accommodative. Diversification will be the best approach for investors and that is how we will invest assets entrusted to our care. Still during volatile times, there are often market inefficiencies and we will continue to look for quality investments at attractive valuations.

Even though we can discuss the factors we believe will influence the markets and how the markets may react, that still does not make the volatility any more comfortable. Understanding how your investments are supporting your plans can help reduce some of the anxiety caused by this volatility.  We are only a phone call away, and when you feel it is appropriate to venture out, we are available to meet and discuss your portfolio. What matters to you, matters to us.

About the Author

Michael List, CFP®

Michael List is a Portfolio Manager, helping execute investment strategy, transactional execution and overall portfolio management for Security National Bank's Wealth Management Division. He has been a member of the SNB Wealth Management team since 2008.