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The Federal Reserve is set to leave its policy unchanged once again, leaving the stage for politicians to provide their share of the stimulus. Warming up to Yield Curve Control would boost markets while expressing worries about valuations – a low probability scenario – would send them down, in the opinion of FXStreet’s analyst Yohay Elam.

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Key quotes

“While its Main Street lending scheme has yet to be fully implemented, reporters may ask Powell about Yield Curve Control (YCC). The idea is that the central bank keeps long-term borrowing costs depressed to a specific level or range. Powell is likely to leave an open door to such a program but may show more openness. Just by showing less reluctance to examine the idea, Powell would send investors rushing to bonds. Diminishing returns on American debt may, in turn, send the dollar further down and stocks higher.”

“The Fed decision is due out two days before a set of emergency federal assistance expires. Republicans and Democrats are negotiating the next steps and Powell may prefer not to get in the way. In the past, Fed officials, including the Chair, encouraged elected officials to act. Powell may reiterate that message, albeit perhaps more subtly. In the unlikely case that politicians cut a deal before the Fed decision, Powell will likely raise their moves.” 

“Is there a new stock market bubble? Reporters may ask that question and Powell will likely fill up the punch bowl – just by avoiding any alarmist remarks. Shares may plunge and the safe-haven dollar would surge if Powell pulls away from the punch bowl by saying there is ‘froth’ in some parts of the market. That would be a hint that technology stocks are worrying about the central bank. In the extremely unlikely cases that such words make it to the Fed’s statement, markets would panic.”