Fed Preview: How A Dose Of Economic Christmas Cheer Could Spoil The Market Mood

Will the Federal Reserve bring a Christmas gift to markets? A cheerful outlook will not do – investors want money, not words. If the Fed holds tight, the dollar has room to rise.

The world’s most powerful central bank elevated expectations for expanding its bond-buying scheme back in November when it disclosed that the recalibration of its Quantitative Easing was thoroughly discussed. However, since then, officials from Chairman Jerome Powell and downwards have been upbeat about the economy.

Person Holding Blue and Clear Ballpoint Pen

Image Source: Pexels

Powell said that the recovery exceeded expectations while the Chicago Fed’s Charles Evans – a dove – hinted that there is no need for further stimulus at this point. Evans’ words came just before the bank’s blackout period preceding a rate decision. If investors expect more money from the Fed, the only hope comes from the latest weak Nonfarm Payrolls report – showing an increase of only 245,000 jobs, roughly half the early estimates. On the other hand, the Unemployment Rate continues falling, beating estimates every month.

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Source: FXStreet

Focus on forecasts

Hopes for a further boost also stem from Congress’ failure to agree on a new stimulus bill. A bipartisan proposal that would ensure some relief in the lame-duck period lit investors’ eyes – but Democrats and Republicans still seem to have a long way to go before agreeing on a deal and the clock is ticking down toward Christmas.

Will the bank step in instead of Congress and provide a boost to the economy – or at least to markets? That is the hope of some analysts, but why should the Fed just two days after the US began a vaccinating scheme? Moreover, a new administration is coming in, and the Fed would likely prefer to wait before announcing new decisions.

The bank has already had a busy 2020, including bloating the balance sheet by some $3 trillion, announcing scores of lending programs, slashing rates to zero – and committing to prioritizing employment at the expense of letting inflation overheat.

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