FOMC Preview: What else can the Fed do?

The Federal Open Market Committee is undergoing a monetary policy meeting and will announce its latest decision on Wednesday. The US Central Bank is widely expected to keep rates on-hold, alongside the hip load of stimulus programs, meant to keep the economy afloat throughout the ongoing coronavirus-related crisis. The focus, then, will be on Fed Chairman Jerome Powell’s statement and press conference, as speculative interest will try to figure out what could policymakers do next.

Stimulus and more stimulus

In this particular meeting, the central bank will also present the Summary of Economic Projections, which includes fresh policymakers’ expectations about growth, inflation, and employment. Regarding growth, there are no doubts that the economy will contract this year, although is yet to be seen the extent of it. A mild recovery is expected for 2021, and the Fed will have to continue to support the economy until there are signs of economic recovery.

The unprecedented amount of stimulus pumped into the economy in the last three months may trigger new issues,  including a pick up in inflation. Uncertainty is high, not only about what the Fed could do, but also about how and when the economy could recover, and how COVID-19 will develop in time. Would the world avoid a second wave that will end up worsening the economies even further? Or could a vaccine put an end to it?

Dot-plot to offer clues

The dot-plot could bring some certainties over how policymakers foresee the future of rates and economic indicators. Up to now, the market is expecting rates to remain at the current levels until at least the first quarter of 2021. Any sign that rate hikes could take place before that they would be quite a positive clue. The same goes for growth figures. Do policymakers expected a V-shaped recovery or would the comeback will be slow throughout several quarters? Those are some of the questions the market expects the dot-plot to answer.

 The levels of unemployment in the outlook will also gather attention, particularly after the positive surprise from the Nonfarm Payroll report released last week. Is the US economy still in its way to double-digit unemployment or the worst is over? Chief Powell will stress out that uncertainty is high, as he did multiple times over the past few months.  Negative rates are out of the equation, but that’s another possible surprise factor.

Multiple other doubts will persist, but for sure, this meeting will bring some answers, hence, granting action.

Dollar possible scenarios

The American dollar has been on a franc decline ahead of the event, undermined by a better perception of risk. Despite the gloomy economic figures from the last couple of months, the focus shifted to economic recoveries. It will the speed of this last in the eyes of the FOMC that will move the market. Further rallies in Wall Street on an optimistic outlook, will likely keep the greenback under pressure.

Risk-off after the announcement, on the other hand, would favor safe-haven assets, the dollar included. Gold could be the biggest winner in this scenario, as its refugee condition will couple with the excess of liquidity provided by central banks.