Federal Reserve Preview: How the Fed could drown markets while trying not to rock the boat

  • The Federal Reserve will likely leave its policy unchanged in its last pre-election decision.
  • New forecasts will likely show better employment outcomes after upbeat figures for August.
  • Sensitive markets may react with a drop to the lack of imminent action.

"My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?" – President Donald Trump's rant against his appointee to lead the world's most powerful central bank still echoes, despite improving relations. The Fed will likely leave its policy unchanged – and try not to rock the boat – in its last decision before the elections. 

Officials at the bank clarified that there is no urge for additional stimulus at this point – especially as the economic recovery remains on track. The unemployment rate surprisingly dropped to 8.4% in August and despite a slowdown in the fall of jobless claims, the trend remains promising. 

Source: FXStreet

The focus on labor is not coincidental. Federal Reserve Chairman Jerome Powell laid out a new policy framework in late August, namely focusing on full employment, even at the expense of letting inflation overheat. The message was that the Fed will leave low borrowing costs for longer – perhaps through 2025 according to Goldman Sachs.

However, the bank is unlikely to act in the short term. Vice-Chair Richard Clarida – one of the architects of the Fed's review – clarified that setting negative rates or controlling the yield curve are currently off the table. Moreover, the Washington-based institution is unlikely to hint any change before the vote – avoiding being seen as intervening by the candidates. 

New dot-plot focus

Nevertheless, the Fed unveils new growth, inflation, employment, and interest rate projections, known as the "dot plot." With borrowing costs set to remain at rock bottom for a few more years, and inflation deprioritized, markets will be watching unemployment and economic expansion forecasts. 

The previous projections from the June meeting:

Source: Federal Reserve

The bank previously had doubts if the jobless rate would drop back to single digits by year-end – yet it has already happened, prompting an upgrade to the outlook. How will markets react? If the Fed foresees an ongoing downtrend in unemployment, that would imply a rate hike sooner than later – something that may worry markets. However, that may have a minor impact, as investors focus on the shorter term.

Growth is harder to estimate given the nature of the virus. The Fed will likely remain more cautious and foresee a slow return to pre-pandemic output levels – probably not before the end of next year. In this case, 

If the Fed refrains from optimism on a return to growth, it means lower rates for longer, something that markets would cheer. On the other hand, investors may become more concerned about the bumpy road ahead. US equities – and especially high-flying tech-stocks – have suffered a downtrend correction, that may have yet to reach the bottom. 

Fed pessimism combined with inaction and already sensitive markets could send stocks down.

In this particular case, the safe-haven dollar may find demand. The greenback has been under pressure throughout the summer and perceived hawkishness from the Fed would allow it to rise. 

Powell will likely repeat his call on elected officials to do more. Republicans and Democrats have failed to provide further relief, six week after substantial measures have lapsed. Falling unemployment has allowed the GOP to feel more relaxed despite facing voters shortly. 

The Fed Chair will find it hard to walk a fine line between calling for action and conveying a message of helplessness. Nevertheless, any request for others to do more could be seen as building the case for Fed inaction in the current touchy environment. 


The Fed may attempt to remain out of the spotlight ahead of the elections, yet sensitive investors may rush to the exits at any sign of inaction. 

More: What is behind the greenback comeback? Not only the NFP

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

Latest Forex Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD: Portrays bearish set-up on D1 below 1.1900

EUR/USD edges lower around 1.1870 amid a quiet start to the week’s Asian session trading on Monday. The major currency pair snapped a four-day uptrend on Friday, posting the bearish spinning top candlestick.


GBP/USD: Bears brace for 200-SMA retest

GBP/USD begins the trading week on lower ground near 1.3900. The cable pair broke a short-term rising channel during the late Friday and teased bears amid a downward sloping Momentum line. The selling currently aims to retest the 200-SMA support near 1.3835, a break of which could highlight the 1.3770 area comprising multiple levels marked last week.


EUR/USD: Portrays bearish set-up on D1 below 1.1900

EUR/USD edges lower around 1.1870 amid a quiet start to the week’s Asian session trading on Monday. The major currency pair snapped a four-day uptrend on Friday, posting the bearish spinning top candlestick.


Tide turning in favor of SHIB bulls, as $0.00000750 beckons

Amid an upbeat momentum seen across the crypto board, Shiba Inu is taking inspiration on Sunday, as it looks to extend Saturday’s upswing from near the $0.00000590 support area. SHIB bulls await acceptance above 21-DMA to unleash further upside towards 50-DMA.

Read more

Challenging week ahead

Three macro considerations are shaping the investment climate: the evolution of the virus and the response, the timeframe of the Fed's tapering, and China's broad regulatory crackdown. Beijing's new policy initiatives are broader and quicker than generally anticipated.

Read more