Fed Preview: Commitment to act and calls to government assistance the best case for S&P 500

Optimism and commitment to act by the Federal Reserve (Fed) would boost stocks and weigh on the safe-haven dollar while pouring cold water would send stocks tumbling and the greenback to a comeback, Yohay Elam, an analyst at FXStreet, reports.

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Key quotes

“GDP outlooks will be of high interest. Powell and his colleagues may pour cold water on V-shaped recovery hopes by foreseeing full recovery only in late 2021. Will that stop equities? Perhaps it would take a gloomier outlook to depress expectations. Hopes for a near-full-bounce by year-end would boost stocks.” 

“Back in April, Powell made an unequivocal commitment to take more action to support the economy, and the Main Street program is one of the ways of fulfilling that pledge. [...] Taking time to digest all the action may weigh on markets while reiterating the vow to act in the same manner would underpin another leg higher in stocks.”

“The Fed remains united against setting negative interest rates. Reporters will likely ask about that, and Powell is set to reject it altogether. In the unlikely case that the Chairman changes his mind, shares may rally. Otherwise, that topic seems to be off the table.” 

“Powell is unlikely to state that there is a bubble in equities – nor that he propelled equities higher. He will probably refrain from using the word ‘froth,’ but may say that valuations in some sectors may be elevated, or something along these lines. Any warning shot, as subtle as could be, would trigger a drop in equities while avoiding commenting on markets would allow for further gains.” 

“The best scenario for the S&P 500 is that Powell calls on the government to provide further assistance, yet without retreating from his commitment to do more.”