Fed Analysis: Powell adds fuel to the market fire by defending QE, rally set to extend

How can the Federal Reserve compete with the dramatic US elections? It probably cannot steal the show but is adding fuel to the market fire. 

The Fed has left its rates unchanged as expected, making minor changes to the accompanying statement. At first, it seemed that the world's most powerful central bank was succeeding in not rocking the boat, striking a balance between expressing content about the recovery so far but airing concern about the risks of the virus.

However, when Federal Reserve Chairman Jerome Powell began speaking, he gave the market reasons to tune in. He began by saying that the pace of the recovery has moderated. That served as a hint that the Fed is ready to act. 

While he called for more fiscal policy – saying it would trigger a strong recovery – he explicitly opened the door to more support from the Fed. Powell said that "today's meeting was about analyzing asset purchases", indicating that more bond-buying could be underway. 

Moreover, answering a question, he stressed that Quantitative Easing is not only meant to smooth financial conditions – aka keeping stocks happy – but also supporting the real economy. That gives a justification to expand the current pace of purchases. 

Financial markets love money, coming from the fiscal or monetary stimulus. They were already on the rise in anticipation of a decisive outcome in the US elections. While a split Congress could approve a large relief package, a quick resolution is better than a contested one. 

Powell's words add fuel to the market fire and could contribute to extending the rally. For the dollar that is another bout of bad news. The greenback is on the back foot across the board, with USD/JPY hitting the lowest since March. 

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