US markets found peace in the month of December as year-end funding pressure did not materialize and liquidity conditions remained robust.
This was the first year in several where massive gyrations in funding levels were not felt. While the market responded with a collective sigh of relief, there remained an abundance of concerns away from the US cash market (COVID, politics, etc.). And all the while, equity markets turned a blind eye and continued to reach new highs. We all want what they are having.
The US Federal Reserve (Fed) left policy rates unchanged at their December FOMC meeting. They made few changes to the language in their press release. They dropped the reference to maintaining the current pace of purchases “over the coming months” and replaced it with “substantial further progress has been made toward the Committee’s maximum employment and price stability goals”. This leaves the quantitative easing (QE) door wide open and confirms they have no near-term plans to reduce their purchases of $80 billion of US Treasury securities and $40 billion of US mortgage backed securities per month. There has been discussion of inflation pressure, particularly on the service sector, as we emerge from lockdown and resume normal life. Fed Chairman Powell commented that this scenario has the “markings of a transient price level adjustment rather than an acceleration of inflation” and we could not agree more.
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