Fed: No real news to extend dollar’s recovery and weigh on stocks

The Federal Reserve’s projections reiterate the message of low rates while growth is forecast to return to pre-pandemic levels only by the end of 2021. The cautious message may boost the dollar and weigh on sensitive stocks. Focus shifts to Congress, where there is fresh hope for a deal, FXStreet’s analyst Yohay Elam reports.

Key quotes

“Read my dot-plot, no new rate hikes – that is the message from the Fed. The new projections are pointing to low chances of higher borrowing costs in 2023, certainly not beforehand. That is merely a repeat of the previous messages by the Fed, as published in June.” 

“The new growth projections show a shallower contraction in 2020 – 3.7% against -6.5% last time – but also a softer bounce in 2021, 4% instead of 5%. Overall, a return to 2019 output levels are due only by the end of next year – a Nike-swoosh recovery. The Fed remains concerned about downside risks coming from coronavirus.” 

“Yet for markets, it is a disappointment. Stocks have already been climbing down the high trees they hit in late August and they remain sensitive. The US dollar has also managed to halt its fall. This decision may extend the greenback’s recovery and equities descent.” 

With the Fed refraining from rocking the boat, the focus shifts to elected officials. After a long deadlock, there is new hope for a new fiscal relief package. With the Fed out of the way – and unhelpful to markets – the next rally depends on lawmakers. Without progress there, stocks could fall and the safe-haven dollar could rise.”