Powell Quick Analysis: Doom, gloom, and no negative rates set to tank stocks, boost dollar
- Fed Chairman Powell paints a gloomy picture of the economy.
- His pledge to do more initially encouraged investors.
- Without a pledge to set negative rates, the gloom could send stocks down, the dollar up.
Almost 40 percent of those in households making less than $40,000 a year had lost a job in March – one of the gloomy quotes from Jerome Powell, Chairman of the Federal Reserve. The text of his speech consists of concerns about long-lasting damage, lower productivity, and other dire projections.
He said that the Fed's actions – zero rates, over a dozen loan plans, and trillions of newly created money – will not be the final word. The world's most powerful central has surprised those that suggested it has run out of course again and again. Even with unlimited Quantitative Easing, the Fed may find additional tools. That promise has initially sent stocks higher and the dollar down.
However, the upward move has faded out. One topic that Powell left untouched is negative interest rates. Bond markets priced that in 2021 but officials rejected the idea. By not addressing the topic, is the door open to going below zero? That seemed to be the initial notion. President Donald Trump also wanted the Fed to give the "gift" of negative borrowing costs.
But is Powell warming up to negative rates? No. He said that the bank's view has not changed – and that all members said it was no attractive tool. That was in response to a question. The speech available live here.
That is set to keep equities under pressure and the dollar down. Why? Negative interest rates make investing in the stock market more attractive as letting money sit incurs losses. For the dollar, it means the Fed is competing with the European Central Bank and the Bank of Japan – that already have sub-zero borrowing costs. By holding up positive rates, the greenback is more attractive.
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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.
