Fed’s Dovishness Failed to Impress the Markets; Elections are the Next Key Event

The Federal Reserve has decided, interest rates will remain zero at least through 2023.

The central bank is not expecting to see the inflation pick up for years, and even then, it will keep the rates at zero, a move the Fed Chairman Jerome Powell called strong and “powerful.”

Initially, the stock market and Treasury yields move higher in response to Fed planning to keep its asset purchases at current levels only to slide soon after. Powell said,

“We’re going to continue to monitor developments, and we’re prepared to adjust our plans as appropriate.”

The Fed reemphasized that it is “committed” to using its full range of tools to support the US economy, which has seen “tremendous” hardship by the COVID-19 pandemic. In its FOMC statement, it says weaker demand and significantly lower oil prices are holding down the consumer price inflation.

More Fiscal Support Needed

With inflation running “persistently” below the longer-run goal, the Committee aims to push it above 2% for “some time.” Also, to keep the rate at 0 to 1/4 percent and “until labor market conditions” have improved and reached the maximum level.

The market found Fed’s guidance dovish — “lower rates for longer, higher equities, weaker dollar,” said Jon Hill, senior fixed-income strategist at BMO.

Powell also said that economic activity has picked up from the depressed level in Q2, and signs of improvement in business investment have been seen. However, the outlook for the economy remains extraordinarily uncertain.

He also noted that fiscal actions taken so far made a critical difference, and further direct financial support may be needed.

But Markets Uncertain Until Elections

With Powell saying full recovery may need continued support from monetary and fiscal policy, asset prices will get the chance to run even higher. However, the fiscal package is unlikely to come through before the elections in November.

Now that the FOMC meeting is out of the way, other key variables for the market involve the election itself and the reopening and vaccine theme, the latter of which are “bullish” as per trader and economist Alex Kruger.

While these variables matter for stocks and macro assets, crypto markets will be just as affected given bitcoin’s correction with stocks and gold.

Yesterday, BTC jumped above $11k, although today it is back around $10,800. As for the general crypto market, DeFi, which was crushed at the beginning of the week, is finding its foot again thanks to popular DEX Uniswap launching its own token, which also pushed Ether higher.

Looking ahead, Bitcoin will trade like a macro asset, but until elections, it is expected to be a noisy affair, said Kruger.

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