Fed Meeting to Cap an Eventful 2020 for Monetary Policy

Written by: Tim Benzel, CFA, VP & Sr. Portfolio Manager

The Federal Reserve is set to hold its final Open Market Committee meeting of 2020 this week, which will cap what has been an extraordinary year for monetary policy. It wasn’t that long ago (although it feels like ages!) that the Fed introduced a raft of stimulus programs to support financial markets during the crisis that engulfed March and April. These included several programs designed to bring liquidity to markets that essentially froze. Now, with normalcy having largely returned, the Fed will turn to the near and medium-term economic outlook, and to how the Fed’s current stimulus programs will evolve throughout 2021 and beyond. Most importantly is the quantitative easing program, which involves purchasing $120 billion of Treasury and Government Mortgage Backed securities each month. Entering December, market participants had been expecting the Fed to change the mix of these purchases to focus on longer-dated maturities in an effort to keep longer-term interest rates low. However, with recent positive news regarding the distribution of a Covid-19 vaccine, and an economy that is weathering the recent lockdowns decently well, it remains to be seen if the Fed will act. In addition, many economists are releasing rosy outlooks for the second half of next year as people get back to work and pent-up demand for various services is realized.

We believe the outlook for the QE program is extremely important to financial market behavior in 2021. In early 2013, the Fed announced its intention to wind down its then QE program earlier than expected. What followed was a short period of extreme volatility known as the “taper tantrum.” As such, we will be looking for guidance this week as to how the Fed views the current program, and what metrics it will use to determine when the time is right to slow purchases. And while that time is likely several quarters (if not years) away, the forward-looking nature of financial markets and the Fed’s large impact on market behavior make this a relevant question now.

Related: Investors Look Past Near-Term Economic Datapoints