Here’s what to watch for ahead of tonight’s all-important US Federal Reserve announcement
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As global stock prices remain buoyant, all eyes will be on the marquee markets event of the week later tonight when the US Federal Reserve delivers its latest policy announcement.
Fed meetings are always closely watched, but central bank updates are likely to take on increased importance in the coming months, given the unprecedented levels of stimulus that were deployed in the wake of the COVID-19 crisis.
And with stock markets pricing for a strong economic rebound, analysts will be hanging off every word from Fed chairman Jerome Powell to try and detect any subtle shift in language that could hint at a change in the Fed’s outlook.
For starters, tonight’s announcement will mark the first time since December that Committee Members will issue a set of economic forecasts — a practice they canned in previous months when the Fed clearly articulated a “whatever it takes” approach to keep markets functioning.
It marks a notable change from mid-March, when the Fed slashed interest rates by a mammoth 100 basis points (1 per cent) and announced a $US700bn (~$1tn) bond-buying (quantitative easing — QE) provision, before quickly revising that to unlimited QE.
It’s very unlikely the Fed will change either of those policy settings at tonight’s announcement. But it’s what the Fed indicates it may do next which is the important part for stock investors.
For example, analysts at Goldman Sachs and JP Morgan both indicated they expect the Fed to forecast a sharp economic contraction for 2020, with interest rates likely to stay on hold near zero through until 2022.
So if the consensus view of Committee Members is that the Fed may need to raise rates faster than that, it could provoke a market response.
In addition, while the Fed’s actions have eased concerns about liquidity in financial markets, Powell will also be fronting the media in the wake of the barnstorming rally in stocks which has seen the NASDAQ index climb back to all-time highs.
The Fed has a sole inflation mandate, so while Powell may not comment directly on stocks, he may be asked questions about financial stability in the wake of huge and rapid increases in the money supply to keep markets functioning.
Another complicating factor ahead of tonight’s meeting is that it’s only about a month until US fiscal stimulus measures — which have also been essential in preventing an economic crash — are scheduled to be rolled back, and Republican lawmakers are taking an increasingly negative view towards any extensions.
All in all, it shapes up as the most interesting Fed meeting for some time, and any unexpected changes to the Fed’s forecasts will have the potential to materially impact Australian markets in Thursday trade.