- Fed commits to rock bottom rates for years, reaffirms ‘whatever it takes’ stance
- Dollar drops initially and stocks jump, but moves reverse as Powell doesn’t commit to yield curve control
- Markets in risk-averse mood overall Thursday, worrisome US virus numbers not helping
- Today: Eurogroup meeting on recovery fund and US jobless claims
Fed says the right things, but markets left wanting
As expected, the Federal Reserve took no action yesterday, signaled via its ‘dot plot’ of interest rate projections that rates will remain near zero until 2022, and reaffirmed that it will continue to buy US bonds at least at the current pace. To be sure, Chairman Powell went out of his way to emphasize that rates will stay low for a very long time, saying that his Fed is “not even thinking about thinking about raising rates”.
The message was loud and clear: policymakers feel they’ve done enough for now, they won’t withdraw any of their powerful stimulus measures until the economy has clearly improved, and they stand ready to do even more if things take a turn for the worse. Markets initially took the dovish message to heart, with the dollar falling on the news and stock markets rebounding, as some investors were likely anxious ahead of the event that Powell might ‘take the punch bowl away’ following the better news from the labour market.
Yet, that didn’t last long, and the dollar rebounded as stock markets surrendered their gains to close lower after the Fed chief appeared reluctant to commit to yield curve control – a measure that has been widely speculated as the Fed’s next step. He noted that the effectiveness of yield curve control is ‘an open question’, with his tone not exactly that of a central banker seriously thinking about implementing it. Of course, it’s only natural the Fed would also want to preserve some firepower for a rainier day.
Markets push the ‘risk off’ button, gold grins
Powell’s hesitation knocked the wind out of riskier assets, with the S&P 500 closing down by 0.5% and e-mini futures pointing to another 1.7% loss at the open today, helping the defensive US dollar that’s been decimated in recent weeks to get its feet under it.
The real winner was gold, which jumped back towards the upper bound of the range it has been trapped in for months now, turbocharged by the confirmation that interest rates will remain at rock bottom levels for as long as the eye can see. Bullion – which pays no interest to hold – becomes more attractive compared to interest-bearing assets like bonds the lower rates fall and the longer they stay low.
Admittedly, the retreat in stocks and the dollar’s modest comeback may also be a sign of fatigue after dramatic movements in both assets lately, amplified by fears that some of the most populous American states are seeing a resurgence in virus infections.
Texas, California, Florida, and Arizona have all shown warning signs of a second contagion wave lately, and the chilling part is that the massive protests in recent days may have powered that trend further. We won’t know whether that’s true for a few more days, but this is definitely something to keep a close eye on going forward as any second wave could throw a real monkey wrench into investor optimism.
Euro turns its sights to EU negotiations
As for today, the key event will be the meeting of euro area finance ministers to discuss the much-hyped EU recovery fund. Any signs that fiscally conservative states like Austria or the Netherlands are softening their position on risk sharing could work in favor of the euro, and vice versa.
US jobless claims are also on the docket, with markets curious to see whether the labor market continues to move in the right direction.