Federal Reserve Optimistic About Unemployment Decline

December 17, 2020
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The Federal Reserve had good news for investors and the wider public on Wednesday, predicting that the unemployment rate would decline significantly in 2021.

After a year when the Coronavirus Pandemic closed large segments of the economy, it’s reassuring to know that the nation’s leading economists are optimistic about the future.

Here’s what the Fed predicts, and what it could mean for the investment markets.

Unemployment Rate at New Low for the Pandemic

The U.S. unemployment rate declined to a new low during the pandemic, hitting 6.7% in November. This follows a rate of 3.5% in February before the pandemic, which went as high as 14.7% at its peak. The rate has gradually improved throughout this year as businesses have reopened.

The Federal Reserve believes that unemployment will continue to decline in 2021, at a rate faster than initially predicted. Board Chairman Jerome Powell and his colleagues believe it could fall to 5.5% next year. This would still be far off from the lows seen earlier this year, but it will be a step in the right direction.

The distribution of Coronavirus vaccines from companies like Pfizer (NYSE: PFE) and Moderna (NASDAQ: MRNA) will help with the recovery. As more people become immune to the highly infectious and deadly Coronavirus, companies will be more willing to operate at previous levels with fewer restrictions on social distancing that interfere with normal business.

Consumer spending is a factor in the employment rate. As consumers have less money to spend, companies are forced to reduce staffing levels or close altogether. Analysts predict that the unemployment rate will reach a normalized level of 3.7% by 2023.

Benchmark Interest Rate Still Low

In an effort to stimulate the economy by keeping borrowing affordable, the Fed has maintained its interest rate close to 0%. This means that mortgages, commercial loans, and institutional loans will remain accessible throughout 2021.

For investors, the news is positive. Affordable borrowing should allow businesses better access to capital for expansion. A shrinking unemployment rate will help to restore consumer spending to previous levels, which will then contribute to GDP growth.

The stock market has rallied towards the end of this year, largely due to the distribution of Coronavirus vaccines. Pfizer’s vaccine is already being used in the United Kingdom and the United States, and Moderna’s vaccine is likely to be approved in the coming weeks.

Stocks have been largely protected from the Coronavirus Pandemic considering its far-reaching effects on the economy. Investors can at least have some confidence that well-diversified portfolios will maintain or increase in value when carefully managed.

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