Fed Quick Analysis: No news is good news for the dollar, at least until Congress moves


  • The Federal Reserve's projections reiterate the message of low rates. 
  • Growth is forecast to return to pre-pandemic levels only by the end of 2021.
  • The cautious message may boost the dollar, weigh on sensitive stocks.
  • Focus shifts to Congress, where there is fresh hope for a deal.

Read my dot-plot, no new rate hikes – that is the message from the Federal Reserve. The new projections are pointing to low chances of higher borrowing costs in 2023, certainly not beforehand. That is merely a repeat of the previous messages by the Fed, as published in June. 

The accompanying statement has undergone a change, committing to an average inflation target – yet that is also unsurprising given the dovish policy shift that Federal Reserve Chairman Jerome Powell delivered in late August. 

The new growth projections show a shallower contraction in 2020 – 3.7% against -6.5% last time – but also a softer bounce in 2021, 4% instead of 5%. Overall, a return to 2019 output levels are due only by the end of next year – a Nike-swoosh recovery. The Fed remains concerned about downside risks coming from coronavirus. 

With a cautious message and no real news about rates, markets may need more help from the central bank to recover. However, the Fed only commits to doing what is necessary – nothing imminent. It makes sense for civil servants not to rock the boat in their last decision ahead of the elections.

Yet for markets, it is a disappointment. Stocks have already been climbing down the high trees they hit in late August and they remain sensitive. The US dollar has also managed to halt its fall. This decision may extend the greenback's recovery and equities descent. 

With the Fed refraining from rocking the boat, the focus shifts to elected officials. After a long deadlock, there is new hope for a new fiscal relief package. Democrats and Republicans are reportedly making progress toward a deal worth around $1.5 trillion.

Details are still lacking and nothing is certain, but it seems that the unimpressive rise in August's retail sales may have injected new life into talks. The meager 0.6% increase in headline expenditure – and drop of 0.1% in the control group – show that the lapse of government support in late July is hurting the economy. 

With the Fed out of the way – and unhelpful to markets – the next rally depends on lawmakers. Without progress there, stocks could fall and the safe-haven dollar could rise. 

See Retail Sales Quick Analysis: Miserable figures good for gold as fiscal help could come sooner

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