Fed Quick Analysis: Supporting stocks and downing the dollar, as long as necessary

  • The Fed left rates unchanged and vowed to keep them low
  • Powell's pledge to buy bonds in the "amount needed" should support stocks. 
  • Dollar pressure will probably continue, also amid optimism 

"Whatever it takes" – that phrase belongs to then-European Central Bank President Mario Draghi, who lifted the euro from existential risk. Yet that is the message from the Federal Reserve as it takes stocks from its massive stimulus to mitigate the economic fallout from coronavirus. 

The world's most powerful central bank acknowledged the severe economic situation and said it would leave rates at the bottom at least until the economy gets back to on track. The seems like a neutral statement as most people are only emerging from the lockdowns, yet another phrase is more telling and certainly market-positive:

Here is the final paragraph from the Federal Open Markets Committee's statement, emphasis mine: 

To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor market conditions and is prepared to adjust its plans as appropriate.

The bank seems to pledge unlimited buying and to take markets into consideration, considerably. That should keep equities on the mend. 

Moreover, Jerome Powell, Chairman of the Federal Reserve stressed that the bank will do whatever is needed and that there will likely be a need for more action. 

For the dollar, this is depressing news, especially due to the greenback's role as the world's reserve currency. As FXStreet Senior Analyst Joseph Trevisani wrote "Cash is king and the dollar is the king of cash" in times of trouble. Yet with vast bidding from the bank, markets may prefer other assets rather than hard currency.

The dollar's safe-haven status is no playing against it and that factor is more significant than the Fed's money printing. 

Beforehand, we learned that the US economy contracted by an annualized rate of 4.8% according to the first release published earlier in the day, below expectations. That consisted of worse-than-expected consumption, which plunged by 7.6% annualized compared with around half of that level expected. 

Yet more importantly for markets, hope for a coronavirus cure is prevalent. Gilead's Remdesibir has shown success in improving the condition and lowering the mortality rate of COVID-19 patients. The news already boosted share values weighed on the dollar ahead of the Fed.

Moreover, Bloomberg is reporting that the administration is working on rapid development of a coronavirus vaccine, reaching 100 million doses by year-end. That adds to optimism. 

More: Fed Interest Rate Decision Quick Analysis:  Sober crisis management

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