Fed Preview: Pessimism combined with inaction to send stocks down

The Federal Reserve will likely leave its policy unchanged in its last pre-election decision yet sensitive markets may react with a drop to the lack of imminent action, Yohay Elam, an analyst at FXStreet, reports.

See – Federal Reserve Preview: 15 major banks expectations

Key quotes

“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 bank is unlikely to act in the short term. Vice-Chair Richard Clarida 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.” 

“The Fed unveils new growth, inflation, employment and interest rate projections, known as the ‘dot plot.’ 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.”

“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.” 

“Powell will likely repeat his call on elected officials to do more. Republicans and Democrats have failed to provide further relief, six weeks 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.”