Fed Quick Analysis: Three dovish moves boost stocks, why more could come, why the dollar could rise
- The Federal Reserve has left its policy unchanged in a unanimous decision.
- Rate hikes are probably coming in March, but there is no clear commitment.
- Taper continues unchanged, adding more fuel to stocks.
- The dollar is more dependent on balance sheet reduction.
More dovish than hawkish market expectations – as described in the preview – and that is enough to boost stocks, extending their gains.
First, despite a new and more hawkish composition, the Federal Reserve voted unanimously around the statement. There were no hawkish dissenters, showing that Fed Chair Jerome Powell, a dove, remains in control.
Second, the signal to raise rates does not include a date – "fairly soon" probably means March, but it is not a strong commitment.
Third, the Fed continues printing money – no early end to its tapering scheme. That means a bit more money to support stocks.
Why will it continue? The quick answer is that Chair Powell is dovish, and he will likely convey a calming message. The longer answer is there are signs of economic weakness, geopolitical uncertainty and potential signs of easing in chip shortages that could also cause the Fed to err on the side of caution.
What about the dollar? The greenback has marginally dropped but remains strong. Against gold, the dollar is rallying. The reason is a separate document the Fed released alongside the statement. It describes the reduction of the balance sheet, which means letting maturing bonds expire and also selling Uncle Sam's debt. That is triggering a sell-off of bonds. Consequently, the yields are higher. That is especially painful for gold, but currencies will likely catch up – in a negative way, falling against the dollar.
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Author
Yohay Elam
FXStreet
Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.
