• The Federal Reserve has left its policy unchanged but expressed concerns.
  • Acknowledging the recent weakness and inflation concerns show the bank remains dovish.
  • Amid market exuberance, the Fed allows stocks to party and the safe-haven dollar to decline.

Trying not to rock the boat – that is often the role of central banks – but the seas are storming. The financial world is fascinated with wild moves in stocks as Gamestop (NASDAQ: GME) and epic battles between retail traders and hedge funds.

Jerome Powell, Chairman of the Federal Reserve, is undoubtedly aware and could have cooled down equity markets by focusing on an upbeat outlook for the post-pandemic world. The US has recently ramped up its immunization program and the Fed's forecasts for the second half are upbeat. 

Instead, the Fed remained cautious and opted to focus on the recent weakness – and there are figures to worry about. The US lost 140,000 jobs in December and Retail Sales declined in November and December – the peak of the shopping season. 

The Fed has two mandates – employment and inflation. On the latter, the bank's statement also leans to the dovish side, by saying that price pressure will likely remain weak until the end of the year. Some market participants see a recovery in consumer prices after the summer. The Fed doesn't, at least not now.

By seeing the glass half-empty rather than half-full – even if the intention is mainly not to commit to anything – has market implications. It gives stocks more room to rise, hoping that the Fed continues pumping money to the economy, as much as needed. 

For the dollar, extending the bank's bond-buying scheme and refraining from any tapering means weakness in the greenback. Contrary to stocks, the party of other currencies may be uneven. The European Central Bank has been expressing growing concerns about the appreciation of the euro and has also reportedly blamed the Fed. Moreover, the ECB may even cut interest rated deeper into negative territory – something the Fed is unwilling to do. 

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