By Tom Burnett CFA
On June 10, 2020, the Federal Reserve Open Market Committee voted unanimously to hold interest rate fed funds to a range of 0-0.25%. The Fed expects these low target rates to apply through 2022 as the U.S. economy recovers from the devastating impact of the Covid-19 pandemic and the measures to control it. The Fed press release makes clear the intention to use all its monetary tools to help consumers and businesses recover. These tools include additional purchases of Treasury and mortgage-backed securities and further interventions in the money-market, commercial paper, and municipal securities markets.
While the Fed indicated that financial markets have improved since March, it now expects U.S. GDP to decline by 6.5% this year. As the economy recovers, the Fed is looking for GDP to grow around 5.0% in 2021. The Fed sees the unemployment rate averaging 9.3% in 2020, improving to 6.5% in 2021.
The market reaction was mildly positive as stocks rallied slightly and interest rates held steady. The ten- year Note yield is now 0.79% down from 0.95% on June 5 and up from 0.49% on March 5. The 30-year bond is yielding 1.55% down from 1.76% on June 5. In early March, that yield was under one percent at 0.93%, but rates climbed off that bottom as stocks rallied on expectations of a strong recovery.
Tom Burnett CFA is Director of Research