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Markets disappointed by the Fed, despite no rate hike for years

17 September 2020

After one of the most anticipated FOMC meetings in recent times, equity markets are sinking across the globe with Asian stocks falling the most in a week. The S&P 500 and Nasdaq 100 futures indicate losses of more than 1% at the open, while the US dollar continues to strengthen against its major peers.

Investors were not satisfied with the Fed’s new forward guidance, although Jerome Powell delivered exactly what he had promised. Interest rates will stay near zero for at least three years and may even remain low beyond 2023. More precisely, the Fed said interest rates would not rise until the economy reaches full employment and inflation moderately exceeds 2% “for some time.” According to the economic projections, the Fed will only get to the two targets by 2023. Still, the term ‘for some time’ is rather vague and was not translated into a specific period which could have been a reason for disappointment.

Markets seem to have wanted more than just low interest rates for prolonged periods. They wanted additional stimulus through increased purchases of Treasury and Mortgage-backed securities, but they didn’t get it. The current program is running at $120 billion per month and Jerome Powell does not see any urgency in adjusting this amount.  In fact, he’s probably right not to do so given many economic data points have surprised to the upside over the past few months.

The Fed by itself cannot generate demand, hence it needs the support from fiscal policymakers to do their job. Looking at the latest retail sales numbers for August, it is becoming clear the bounce in economic activity is losing momentum after Federal relief for the jobless and small businesses dried up last month. Retail sales grew 0.6% in August versus expectations of a 1% rise and when excluding volatile components, core retail sales fell by 0.1%. The longer the delay in providing a new round of fiscal stimulus, the more likely we will see consumer spending and confidence dragged lower, which will most likely result in a further pullback in equity markets.

Investors may want to wait for a five to ten percent correction in stocks before allocating additional capital, as the latest selloff in the first two weeks of September was not enough to encourage them. However, with 46 days remaining until the US Presidential elections, investors can expect to see more volatility along the way. 

As for the Dollar, we forecast some strengthening here after four consecutive months of declines, as traders reassess their positioning. Speculative shorts in the world’s reserve currency have already reached multi-year highs and with many market participants not getting the overly dovish policy expected from the Fed, a short squeeze should provide the Greenback some support over the next couple of weeks. 



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