In the midst of the busiest political week of the year and with the outcome of the presidential election still uncertain, the Federal Open Market Committee (FOMC) did its best to fly under the radar at its November meeting. As anticipated, the FOMC made no adjustments to monetary policy, voting to maintain the current Federal funds target rate at a range of 0.00%–0.25% and continue its current pace of purchases of U.S. Treasuries and agency mortgage backed securities at roughly 120bn USD per month.

Relative to the September meeting, little was changed in the statement. Even after a record-breaking bounce-back in real GDP during the third-quarter, the reality of a worsening pandemic weighing on services activity, weak demand and lower oil prices holding back inflation, and slowing labor market momentum highlighting just how fragile the recovery is, these all remain considerable risks in the committee’s view.

At the press conference, Chairman Powell spent some time dodging questions around the election and how the potential make-up of the next administration could impact monetary policy in 2021 and beyond. However, while the Chairman may have skillfully toed the line, as investors, it is important to recognize that both monetary and fiscal policy have played critical roles in combating the effects of the pandemic, and will continue to do so under the next administration. Indeed, in fiscal year 2020, the U.S. reported a 3.3 trillion USD deficit, of which the Federal Reserve financed ~2.0 trillion USD in just a 6-month period. Easy monetary policy and asset purchases have helped keep interest rates low and should continue to encourage government spending going forward. With this in mind, it is reasonable to expect the FOMC to commit to extending its asset purchase program well into next year, as the Congressional Budget Office (CBO) expects the U.S. government to run a deficit of 1.8 trillion USD in FY21 before accounting for any additional pandemic-related relief.

The Fed looks set to remain accommodative for some time. While votes are still being counted, the most likely outcome appears to be a divided government, which will likely lead to less fiscal stimulus than was originally expected under a blue wave scenario. Notably, should virus statistics continue to deteriorate, the Fed should have a bit more comfort in providing liquidity to markets without the risk of generating consumer price inflation.

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