Market Overview

17 December 2020

Powell Waved Support for Markets as Long as Needed

Federal Reserve (Fed) and its Chairman Jerome Powell have said nothing particularly new after the Fed’s Federal Open Market Committee meeting, which was the last meeting for 2020. Hopes for a further softening of monetary policy by the Fed eventually were not fulfilled. Interest rates were kept within the range of 0-0.25% and the Fed will continue to increase its holdings of securities by $120 billion a month, disappointing those who hoped for an extension of the purchase program. The monetary policymaker will buy U.S. Treasuries for at least $80 billion per month and agency mortgage backed securities for at least $40 billion per month until substantial  progress has been made towards completing the Committee’s maximum employment and price stability goals. The structure of the Quantitive easing program was also left unchanged, putting a damper on expectations that a change in the program would result in Treasuries with longer maturity. Jerome Powell again urged lawmakers to provide additional fiscal support to the economy.

However, the Fed has provided a more optimistic outlook on the U.S. economic performance as it upgraded the GDP growth forecast to 4.2% from 4.0% and the unemployment level was lowered to 5% from 5.5%, where it was placed during the previous forecast.

Such hawkish rhetoric from the Fed did not result in the strengthening of the U.S. Dollar and the decline of risky asset prices, such as crude, stock indices and currencies of the exporting countries, as would have probably been the case in times of healthy economic development. But markets seem to hang on Powell’s words that the Fed will adhere the loose monetary policy as long as needed, that is until labour market conditions reach levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent, and is on track to moderately exceed 2 percent for some time. In case of a worsening economic situation, the Fed said it would be ready to do everything that is needed, including increasing its bond buying program.

So, the message was loud and clear for investors – any risks that may occur would be absorbed by the Federal Reserve.

Risky asset responded cheerfully with a rally and a positive sentiment. The S&P 500 broad market index may climb above all-time highs of 3,700 points. Brent crude prices may edge higher to $53-54 per barrel after breaking through the resistance level of $52. The Greenback weakened further with the U.S. Dollar index falling below the strong physiological level at 90 points. If this downward trend continues, the index might fall to the technical support levels of 88.3-88.8 points, a minimum of 2018.



Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.


Mark Goichmann
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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