In a Nutshell:  “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.”

Decision: Fed funds rate target range remains at 0% to 0.25%.

The Fed kept rates close to zero today.  But that was not a surprise.  What observers were looking for was the tone of the message and the hints the members were sending as to how aggressive they will be going forward.  Put simply, it’s pedal to the metal for quite a long time.

During his press conference, Fed Chair Powell made it clear that there is no timeframe for when the central bank will move off of its aggressive, low rate policy.  As the report states: “The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” 

But that was just a repeat of past statements.  More important was the comment that the virus could impact the economy not just in the short-term but over the next two years as well (the medium-term). Indeed, the economic projections have the funds rate at 0.1% through 2022. 

And the Fed is confident that it can keep rates down for an extending period of time because recent experience.  Mr. Powell stated and restated in his press conference that despite unemployment rates at historically low levels for an extended period, inflation remained contained.  To me, that is saying that rates don’t have to go anywhere until we are at full employment and that could take years to reach. 

While the Fed has made it clear that rates will be low for a very long time, which is good for liquidity and equity prices, we have a long way to go before we get back to where the economy was before the pandemic hit.  The forecasts for economic growth over the next three years (-6.5% in 2020, +5% in 2021 and +3.5% in 2022) imply that we will not see GDP at where it was at the end of 2019 until roughly the middle of 2022 – two years from now!  The unemployment rate is still expected to be in the 5.5% range in the fourth quarter of 2022, compared to 3.5% in February of this year.  Those forecasts are hardly great for earnings, especially given how far the markets have come since the bottom in March.

So, when it comes to equities, investors need to ponder this key question: Will liquidity or economics reign?

 (The next FOMC meeting is July 28,29 2020.)