Fed Preview: Fearing Market Froth Or Boosting Biden’s Stimulus? Three Scenarios

Winter has come – it is darker than thought – but spring is also on its way. Will the Federal Reserve focus on the gloomy economic deterioration or remain upbeat about the near future and even warn about excesses? The answer is set to rock all markets.

Here are three scenarios for the Fed’s first decision of 2021.

1) Play the waiting game

The bank is set to leave the interest rate unchanged near zero and also maintain its bond-buying plan at around $120 billion/month, as Federal Reserve Jerome Powell signaled in recent appearances. He may also refuse to provide any hints about changes to the policy, sticking to a conditional script.

In this scenario – which has the highest probability – stocks may edge lower after their recent gains and the dollar is unlikely to make any substantial waves. Nevertheless, Powell may provide hints towards Thursday’s growth figures.

If the Fed Chair says that recent data was somewhat disappointing, investors may conclude that Gross Domestic Product data for the fourth quarter missed estimates. Retail Sales, Unemployment Claims, and Nonfarm Payrolls all missed estimates. The latter figure showed the first squeeze in the labor market since the spring, and the Fed may be worried that it could fall short of its employment mandate.

Source: FXStreet

If Powell says that the current weakness – a result of the virus’s resurgence in the autumn and winter – was as expected, traders can expect GDP to meet or even beat estimates.

2) Fearing the froth

The financial press has recently highlighted retail traders’ feverish stocking of several shares such as GamestopChurchill, and others. There are also fears about exuberant valuations of more established companies such as Tesla or even frothy valuations of tech giants. The pandemic has brought equity trading to the forefront.

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