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The Federal Reserve (Fed) has recommitted to keeping rates low for as long as necessary to help the economy recover from COVID-19. With the market coming to the realization that the Fed funds rate will likely be near zero until at least late 2022, the potential grows for financial asset price appreciation in fixed income and equities. The damage to the real economy is being offset in asset prices by monetary and fiscal policy.
The challenge of determining valuation in a zero-discount-rate environment where asset prices are supported by the government will continue to be critical for investors going forward. Excess risk-taking and non-fundamentally supported asset prices could have significant consequences. However, in the short term, it will not be the focus of policymakers as the impact on the real economy is too great.
In this environment, discipline and adherence to a long-term plan will be tested.
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