Fed Can't Quit Now
The FOMC decision on Wednesday is a chance to see whether Powell will shy away from an extremely dovish stance or cement his reputation and the Powell put. Expect surging volatility in FX and indices following the Fed dot plots and ensuing press conference. US CPI posted its 3rd consecutive monthly drop. All currencies are up against the US dollar with the exception of CAD. 4 of the 5 Premium trades currently open are in the green. Below is the video for Premium susbcribers.
The equity market has undoubtedly gotten ahead of itself but the question the FOMC faces is if that's their problem. The countless programs, bailouts, QE, ZIRP and junk bond buying halted the decline in equity markets and have been the biggest factor in the +45% rebound.
But those things are also a great help to the economy, workers and home prices. Any kind of a hint in unwinding those programs would take some of the air out of stocks but is that a worthwhile goal when so many jobs are at stake? In the Fed's estimation, probably not.
So the message Wednesday is likely to be the same as it was April 29 when the FOMC said it was “committed to using its full range of tools to support the U.S. economy.” The added wrinkle this time is that economic projections are due. Those were cancelled in March so we have to go back to December when the Committee median was for 2.0% growth this year. That's out the window and so is the 3.5% unemployment rate.
Less important than the numbers themselves will be how the Fed frames them. If Powell says the rebound has been surprisingly strong and the bottom not as bad as anticipated, the market may take that as a message of potential tightening. The caveat would be that if he emphasized that they will let the economy run hot and pin rates low until the economy is well on track to achieve its maximum employment and price stability goals.
Also, keep an eye on any hints regarding yield curve control and whether Powell will signal any potential ouvertures about the topic.
As for the market reaction, it will be an important test for dollar weakness, equity market strength and the breakout in 10-year yields. If the Fed doesn't inspire a strong reversal, then those trends will be solidified.
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