Preparing for a Long Period of Easing

The Fed

Preparing for a Long Period of Easing

The Fed is planning for a prolonged period of accommodation, and seeking to ensure its policies can be sustained as long as needed.

The Federal Reserve (Fed) changed very little in its official statement following today’s Federal Open Market Committee meeting. Aside from a few housekeeping updates, the only real change was the addition of the following sentence: “The path of the economy will depend significantly on the course of the virus.” This, of course, is an uncontroversial observation and its inclusion didn’t shed much light on the future path for policy. Although it may have felt like a long time to most market participants, it appears that nothing in the last six weeks has altered the Fed’s assessment of the economic landscape or the risks ahead.

The absence of changes should not be interpreted as a sign of inaction, however, as the Fed has quite a lot on its plate right now. Next up is the monetary policy review, which has been ongoing since early last year. Chair Powell said that the Fed expects to bring the review to a conclusion “in the near future.” And while Powell was rather guarded in terms of what exactly the conclusion would involve, his comments did provide some hints as to what is currently top of mind for the Fed. In particular, Powell consistently returned to the topic of stress in the labor market as the Fed’s primary focus. He talked at length about the toll of the pandemic on the labor market, and the real hardships caused by widespread layoffs. At one point Powell said that the Fed’s role is to “push as hard as we can on our employment mandate while keeping price stability.” Powell’s ordering of mandates in that statement is worth noting: focus on employment while keeping an eye on inflation.

The monetary policy review may well adopt an average inflation targeting (AIT) strategy, something we wrote about last year. If that happens, one should not conclude that the Fed is focused exclusively or even disproportionately on inflation. To the contrary, Powell’s focus seems to be on the labor market. In that context, it’s important to understand that AIT, which would explicitly welcome an overshoot of the 2% inflation target, serves as a tool to allow the Fed to do even more for the labor market. With an inflation overshoot codified as part of the Fed’s strategy, the Fed would be freer to do as Powell suggests—“push as hard as we can on our employment mandate”—as it would be less constrained by expectations of inflation moving up. That could, in turn, help to address other ongoing issues. For example, today Powell responded to a question about income inequality by saying “a tight labor market is probably the best thing the Fed can foster to go after that problem, which is as serious one.” (Powell seems to be taking it as a given that the Fed should “go after that problem,” which is notable in and of itself). As the consistent revisiting of the theme makes clear, the labor market is Powell’s focus today, it’s likely to be featured in the Fed’s framework review “in the near term,” and it will be front and center for the Fed for some time to come.

After completing the monetary policy review, the Fed will turn immediately to its policy options. Today Powell was similarly guarded in his response to questions about specific policies. Perhaps more will be revealed next month, either in the minutes of today’s meeting or in presentations at the annual Jackson Hole conference. In the meantime, a few things are clear. First, the Fed is planning for a significant easing program. It doesn’t really have much of a choice, given the large distance to its mandates. The Fed’s own forecasts are that the unemployment rate is likely to be above 5% for the foreseeable future. And with regard to inflation, today Powell said “I think fundamentally this is a disinflationary shock.” In that economic context the Fed is appropriately planning on “decisive accommodation,” to use Governor Lael Brainard’s phrase.

Second, the Fed is considering a wide range of tools, likely focused on forward guidance and asset purchases. Forward guidance is now standard fare for central banks at the zero lower bound, and Powell hinted strongly that the Fed would adopt some form of guidance relatively soon. The comments on asset purchases were more noteworthy. For the second meeting in a row Powell said that asset purchases are now supporting financial conditions, and suggested they are a tool that will continue to be deployed as long as further accommodation is warranted. (Our own view is that neither negative rates nor yield-curve control is likely to be used this year, although Powell made no comment on either one today).

Finally, whatever the Fed ends up doing it will likely do so for quite a long time. Powell referred to the “long tail” of economic dislocation, and went out of his way to be clear that “Everyone should know that we're going to be there for all of that.” The Fed is planning for a prolonged period of accommodation and it will make sure that its policies can be sustained as long as needed. This, then, suggests the main takeaway from today’s meeting. Rather than trying to generate a catchy headline or short-term surprise, the Fed is preparing for an easing program that will likely characterize much of the next few years.


The U.S. Federal Reserve, or “Fed,” is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

Average Inflation Targeting (AIT) refers to the use of a specific inflation rate as a target for monetary policy, seeking to promote inflation when price inflation falls short of the target. 



Important Information


All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH. Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People's Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC's commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC's commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (109) Jin Guan Tou Gu Xin Zi Di 016; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827).  The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

The aforementioned Legg Mason entities are wholly owned subsidiaries of Franklin Resources, Inc.