This morning, the US Federal Reserve's Federal Open Markets Committee (FOMC) announced its decision to maintain its current levels of quantitative easing and aggressive monetary policy. This was not surprising, and neither was the effect on the equity market, US dollar, and price of gold, but there's still some value in picking through the Fed's press conference and presentation materials.

For the full script of the press conference, click here.

For the charts and graphs released alongside the press conference, click here.

Dot Plot Forecasts Low Rates For the Foreseeable Future

The Federal Reserve's "dot plot" is a visualization of each committee member's projection of appropriate policy rates for the next three years, plus a long-term projection. It has some value, as it gives you a broad idea of what FOMC participants think about the future, but be careful not to read too much into it. Any time you're counting individual dots, you're overthinking it.

Helpfully, this dot plot doesn't require any counting at all:

All of the FOMC participants believe that keeping rates at today's levels is appropriate for this year. As you head into 2022 and 2023, a small number believe that higher rates will be appropriate, but the largest number are still happy with today's rates. It's only in the not-defined "longer run" that we see a significant shift.

The Federal Reserve has been unequivocal: accommodative monetary policy will continue until circumstances improve substantially, and then for a little while after that. Do not expect them rates to rise any time soon.

Inflation is Coming and The Fed is Not Afraid of It

The FOMC has maintained that it won't keep rates low forever, and will continue to pursue its goal of stable prices and maximum employment. The Fed defines "stable prices" as inflation that hovers around 2.0%, and the Fed is eager to achieve that goal and willing to exceed it for some time, if necessary.

Furthermore, the Fed hasn't set any kind of firm timeline or quantifiable milestones that will cause it to raise rates, so even when inflation outpaces expectations - and the Fed itself projects that it will exceed 2.0% in the next year - you still shouldn't expect to see rates rise. Compare this chart, which visualizes how the FOMC participants forecast 2021 inflation, to the dot plot shown above:

Pay particular attention to the dotted lines, which map the same committee's projections from December. The committee believes that inflation will exceed 2.0% in 2021, which is higher than they previously believed, but they also still don't think it's appropriate to raise rates.

Again, the Fed has been unusually straightforward about their plans. They intend to keep rates low for the foreseeable future, even if that means allowing inflation to exceed 2.0%

Cash Management

For Canadian investors, the takeaways from today's announcement are the same as they have been for a few months: monetary policy officials are committed to keeping rates low and maintaining accommodative financial conditions for the foreseeable future. The likelihood of a surprise rate hike could not be lower.

With this in mind, the best approach (and the one we've been recommending to our clients) is simple: maintain flexibility. Attractive rates aren't going to come because of the central bankers, they'll come because an individual issuer has a temporary need for liquidity and is willing to bid up for it. Some of the most attractive rates available today are in High Interest Savings Accounts, and having your money standing by and ready to take advantage of opportunities when they come available will be crucial.

If you'd like to talk about these events or discuss your portfolio, don't hesitate to reach out to us at 604.643.0101.

Cash Management Group

604.643.0101 | Email us

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