Finance Committee Agenda and Packet 2020 09 15

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Economic Update ■ The second quarter was likely the low point for economic activity and the consensus forecast calls for a fairly strong rebound in activity in the current quarter and a slowing pace in improvement thereafter. However, the outlook remains uncertain. We believe the outlook for economic activity is dependent on the course of the pandemic, the amount of additional fiscal relief from the government, and the timeline fora vaccine. Notably, the effects of the pandemic continue to weigh heavily on the labor market. The Fed's highly accommodative monetary policy framework, along will a swift and robust fiscal policy response from the government earlier this year, has provided support for the financial markets amid a very challenging economic backdrop. As expected, the Federal Open Market Committee kept the fed funds target rate unchanged at theirJuly meeting in a range of 0.0% to 0.25%. The Fed extended its emergency lending programs through the end of 2020, a three-month extension, and will continue to use its balance sheet to support the flow of credit and stability of financial markets. Fed Chair Powell indicated that the Fed is more cautious about the downside risks to the economy and less concerned about the upside and potential threat of inflation. In August, Fed Chair Powell delivered a speech at the annual Economic Policy Symposium and unveiled a modest shift to the Fed's monetary policy framework. While the Fed is not abandoning its 2.0% inflation target, the Fed will now seek to achieve inflation that averages 2.0% over time. Should the labor market tighten, the Fed will put less emphasis on preemptive monetary policy tightening to prevent an overshoot of inflation. Instead, the Fed will wait for evidence that inflation is heating up and allow inflation to run above 2.0% for some (unspecified) period of time before it looks to tighten policy. The Fed's updated framework essentially signals that the fed funds target rate is likely to stay low for an extended period of time. On a year-to-date basis, the yield on 2-year Treasuries was down 144 basis points to 0.13% and the yield on 10-year Treasuries was down about 121 basis points to 0.71% at the end of August. In August, the Treasury yield curve steepened, driven by an increase in longer -term rates. We believe a wave of new Treasury issuance in August put increased upward pressure on longer -term rates. Inflation expectations were also creeping higher. So far in September, the yield curve has flattened slightly, reversing some of the curve steepening in August. QVI