Fed Quick Analysis: Powell Put alive and kicking, three factors to boost stocks, down dollar


  • The Federal Reserve has expressed its full support to the US economy via QE.
  • Pledging to keep rates low also helps.
  • Forecasts are less gloomy, also providing hope.

The bank has your back – that is the message from the Federal Reserve to investors. There are no signs of Fed fatigue – the commitment to support the economy remains strong and should boost stocks while dollar printing will likely keep the dollar down.

Here are three ways it is doing that:

1) Rates commitment

The dot plot is showing no changes in rates until at least 2022. While that also implies no full return to previous output by then, it provides a long horizon for investors to favor stocks over fixed income. There are very few dots in 2022 suggesting higher borrowing costs.

To put things into context, the Fed reduced rates three times in 2019 but did not fully reverse the hikes in 2018. It then slashed them to zero amid the coronavirus crisis. While President Trump wants "the gift" of negative rates – the Fed's long-term commitment is substantial. 

2) QE at current levels or more

Jerome Powell, Chairman of the Federal Reserve, has announced that the bank will continue buying bonds and Mortgage Based Securities "at least at the current pace." 

This implies $4 billion per day at a minimum, allowing the government to spend without limits and support the economy. Moreover, the Washington-based institution has not put a time or quantity limit. 

That is naturally positive for stocks, which have risen on the $3 trillion ballooning of the Fed's balance sheet. And it weighs on the dollar.

3) Gloomy forecasts, but it is all relative

The Fed's projections – or dot-plot – foresees an unemployment rate of 9.3% by year-end. While that is horrendous, it is significantly lower than the current 13.3% – and more psychologically significant – single digits.

The outlook for Gross Domestic Product growth is also downbeat in absolute terms – a fall of 6.5% and only a 5% bounce in 2021. That means the output will return to previous levels only 2022, but at least the downfall will not be that horrific. 

Conclusion

The Fed may have been dovish, but it remains fully supportive of the economy, markets, and therefore, a downer to the safe-haven US dollar. 

 

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