The Morning Commentary: The Fed Remains in the Wings
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
The Fed Remains in the Wings
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Andrew Kositkun Foreign Exchange Head Trader
The Federal Reserve kicks off its two-day meeting today. Relative to the U.S. election, the FOMC meeting was always going to be an afterthought. This is especially true as the final result for the presidential race remains unknown.
Specifically on the Fed, little change is expected to the statement, and there will not be an update to the Summary of Economic Projections. Instead, expect the Fed’s statement to reiterate the COVID-19 pandemic’s impact on the economy and note that the ongoing health crisis poses considerable risks to the outlook, especially in light of the recent spike in cases. On the positive side, the Fed should acknowledge the better economic data, particularly the strong third-quarter GDP growth.
Because not much is expected to change, Chair Powell’s press conference should be the main event. At this press conference, the following themes should cover the main lines of questioning.
What is the path forward for the Fed’s balance sheet? Are there any likely changes to the quantitative easing program? In response to these questions, expect Powell to keep the Fed’s options open by discussing the Fed’s flexibility in adjusting the size of its balance sheet to optimally support the economy.
How will the Fed determine that the average 2% inflation target has been met? Thus far the Fed has been vague on its threshold, but it is likely that Powell will indicate that PCE inflation needs to be at least 2% with data showing a clear path to averaging 2% going forward.
How does the Fed view risks from fiscal policy? The current political environment has made it difficult to pass another stimulus bill. Expect Powell to be asked about the impact on the economy from the fiscal stimulus vacuum.
The one thing that is expected to change is an extension to the expiration date for a number of emergency programs from the current Dec. 31 deadline. Usage of these programs has been limited, but they do provide a useful backstop to any deterioration in market conditions, so the Fed should leave these programs in place until the COVID-19 threat has passed. Ultimately, expect the statement and Chair Powell to strike a cautious tone. COVID-19 infections are on the rise, and near-term fiscal policy is uncertain. This makes a dovish stance an appropriate one.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
Risk markets are holding up well with global equities in the green despite no clear presidential election result. A delayed and contested election is now the base case as we wait on the outcome in a handful of states where the reporting could be significantly delayed. This not only means a delayed outcome, but also a likely contested election as the ballot counting process is vulnerable to legal challenges. A split Congress is also the base case now. While there are still Senate races outstanding, the list of states to flip is shrinking quickly given the strong alignment of presidential and congressional votes. Overall, this is fundamentally negative for risk because markets will likely have to navigate the disruptive contested election process and because massive front-loaded stimulus is no longer expected.
The ADP jobs report showed that private companies added 365,000 jobs in October, missing estimates for 643,000 additional jobs.
The U.S. trade deficit narrowed in September as exports rose 2.6% while imports rose 0.5%.
Lyft and Uber are both sharply higher today after California approved a ballot measure that exempts gig companies from state labor laws that would have required these companies to classify workers as employees.
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