Insights Investment

As we look for certainties in this uncertain period, one thing we are confident about is that the Federal Reserve is going to do everything it can to support the recovery, with its new policy framework giving it significant flexibility to do so. In this new environment, US interest rates are likely to be held at historically low levels for years to come, and we believe this will be critical for the outlook of various asset markets and pension plan hedging strategies.

	The Federal Reserve has shifted to a new policy framework—flexible average inflation targeting. This gives the central bank greater flexibility to keep interest rates at historical lows for a long time. We re-examine our outlook in light of this shift to a 'new normal'.
	In our solutions section we ask the question – to hedge or not to hedge? Has the Fed changed the game?
	In pension news, new rules on ESG investment could increase pressure on plan fiduciaries to ensure that decisions are made purely for financial considerations. We highlight how our approach to investing responsibly, in particular using ESG as a risk management tool, helps our clients with their financial goals.
	Issuance in investment grade credit markets has surged in 2020, and in Q3, cumulative year-to-date issuance exceeded the previous 2017 annual record. We have become more cautious as spreads have tightened but acknowledge that a desperate search for yield is likely to continue to drive flows into credit markets.
	Significant uncertainties remain. The US Presidential election is likely to be a major focus of markets in Q4 – with a divergence in tax policies between the two parties, and major implications for issues such as future trade policy. In Europe, the risks are growing that the transition period between the UK and EU ends with no deal, and relations appear to be growing increasingly strained.

• This will see the Fed continue to target inflation at 2%, but over longer periods.
• In the future, if inflation persistently fails to meet the 2% target, it will be allowed to run moderately above target such that inflation averages 2% over time.
• By making this change, the Federal Open Markets Committee (FOMC) hopes to anchor longer-term inflation expectations at the 2% rate.

Since the Fed’s 2% inflation target was introduced by Ben Bernanke in 2012, inflation, as measured by the Personal Consumption Expenditure Price Index, has persistently failed to meet that target over time. This has led to criticism that pre-emptive tightening of monetary policy to dampen perceived inflationary pressures has simply damaged economic growth unnecessarily.

The clear message from this change in policy framework is that investors should expect monetary policy to remain at highly stimulative levels for an extended period.