Fed Preview: Fearing market froth or boosting Biden's stimulus? Three scenarios

  • The Federal Reserve is set to leave its bond-buying plan unchanged and signal a steady hand.
  • Stocks may suffer if Fed Chair Powell warns about market froth.
  • By calling for fiscal stimulus, the bank may hint it is ready to scoop up debt, boosting shares.

Winter has come – it is darker than thought – but spring is also on its way. Will the Federal Reserve focus on the gloomy economic deterioration or remain upbeat about the near future and even warn about excesses? The answer is set to rock all markets.

Here are three scenarios for the Fed's first decision of 2021.

1) Play the waiting game

The bank is set to leave the interest rate unchanged near zero and also maintain its bond-buying plan at around $120 billion/month, as Federal Reserve Jerome Powell signaled in recent appearances. He may also refuse to provide any hints about changes to the policy, sticking to a conditional script. 

In this scenario – which has the highest probability – stocks may edge lower after their recent gains and the dollar is unlikely to make any substantial waves. Nevertheless, Powell may provide hints towards Thursday's growth figures

If the Fed Chair says that recent data was somewhat disappointing, investors may conclude that Gross Domestic Product data for the fourth quarter missed estimates. Retail Sales, Unemployment Claims, and Nonfarm Payrolls all missed estimates. The latter figure showed the first squeeze in the labor market since the spring, and the Fed may be worried that it could fall short of its employment mandate.

Source: FXStreet

If Powell says that the current weakness – a result of the virus's resurgence in the autumn and winter – was as expected, traders can expect GDP to meet or even beat estimates. 

2) Fearing the froth

The financial press has recently highlighted retail traders' feverish stocking of several shares such as Gamestop, Churchill and others. There are also fears about exuberant valuations of more established companies such as Tesla or even frothy valuations of tech giants. The pandemic has brought equity trading to the forefront. 

While the Fed statement is unlikely to address the stock market, reporters are likely to ask Powell about his thoughts and if he shows some concerns, markets could suffer. It would serve as a hint that the Fed will not always be there to support "favorable financial conditions". By pinching holes in markets, the Fed may be preventing a potential bubble. 

As the generosity of central banks is the critical driver of shares, any hint that the Fed is unwilling to continue printing money in fear of bubbles would send them down. The safe-haven dollar would greatly benefit in such a scenario. The greenback has been unable to stage a meaningful recovery and a hint from the Fed could set the spark for a rush to the "king of cash."

The Fed added some $3 trillion to its balance sheet in 2020:

Source: Federal Reserve

Such a scenario would also be backed up by the hope that COVID-19 vaccines would enable a robust recovery in the second half of 2021 – something the Fed has been consistent in predicting. 

3) The Powell Put is backing Biden's boost

President Joe Biden is pushing for a $1.9 trillion stimulus package. While he publically said that he is ready to negotiate, he is also aware of the high price and conveyed a sense of urgency – hinting that Democrats could go it alone. 

Even if the final coronavirus relief package is worth only $1.5 trillion, the government will need to find funding for this extra debt. Is there enough money in markets to scoop up Treasuries? The Federal Reserve may be able to end any doubts by indirectly committing to scooping up a significant chunk of freshly auctioned bonds.

Powell is unlikely to say that directly, but he could hint that a substantial increase in bond yields – a result of high debt issuance – will not be tolerated. So far, the bank has seen the increase of ten-year yields above 1% as a bullish sign for the economy. However, at some point, long-term interest rates would make financial conditions unfavorable

By keeping the door open for increasing the Fed's bond-buying scheme, equities would react positively to the Fed – and so would gold. The safe-haven dollar would suffer another sell-off amid prospects that the newly minted greenback would flow outside the US in search of riskier assets. 


While the world's most powerful central bank is set to leave its policy unchanged, it can undoubtedly rock markets by signaling its next changes in its bond-buying scheme.

See Five factors moving the US dollar in 2021 and not necessarily to the downside 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Feed news

Latest Forex Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD retains weekly gains trades above 1.2000

EUR/USD peaked at 1.2079, now stable in the 1.2030 region. The shared currency holds on to recent gains despite renewed demand for its American rival.


GBP/USD retreats from 1.40 despite upbeat UK job figures

GBP/USD is extending its falls after retreating from 1.40 as the dollar edges higher. Earlier, the UK reported a drop in the unemployment rate to 4.9%, better than expected. The Claimant Count Change also beat estimates with 10.1K. 


XAU/USD tests key Fibo resistance at $1,775

XAU/USD rebounds after closing in the negative territory on Monday. 10-year US Treasury bond yield is edging lower on Tuesday. Additional gains are likely if gold manages to clear $1,775 resistance.

Gold News

WeWork and Venmo join the Bitcoin craze while prices consolidate

The announcement by WeWork that it will begin accepting payments in select cryptocurrencies, including Bitcoin, Ethereum, USD Coin, Paxos, and several others, is another sign of adoption and follows the decision by Tesla to do the same

Read more

S&P 500 (SPX) Update: Equity markets take a well deserved breather, crypto stocks slide

Equity markets took a much-needed break from setting record highs on Monday. Tesla suffered a steep 5% fall after reports of a crash with no one at the wheel. Have a Coke and a smile was up 1% as KO smashed earnings estimates.

Read more