Dow Jones Index Remains near Session Highs on FOMC Rate Decision

FED, Recession, COVID-19, Chair Powell – Talking Points:

• Rates remain unchanged as FOMC meeting concludes
• Equity markets climb higher on virus vaccine hopes
• FED Chair Powell states COVID-19 is causing tremendous economic hardship

As expected, the Federal Reserve kept rates unchanged Wednesday as the Federal Open Market Committee’s two-day meeting concluded. Investors focused in on commentary towards liquidity facilities and the outlook on rates, which are already near zero. The Dow Jones index gave back some gains from earlier in the session as the FOMC statement crossed the wires. Still, markets remain well in green territory after Gilead provided positive news on its coronavirus vaccine.

Dow Jones Index (1-Min Chart)

Source: IG Charts

Despite wide consensus, some speculated that the Fed will bring rates into negative territory, however, Fed Chair Powell commented back in March that it would not be an appropriate policy. Granted that, the central bank took aggressive action through quantitative easing since March as the effects of the virus pandemic surfaced. Rates will remain at 0 to 0.25 percent until it is confident that the economy is clear of the pandemic impacts according to the FOMC statement.

Federal Reserve Balance Sheet

Source: federalreserve.gov

Monetary action appears successful in stemming volatility and illiquidity in credit and other financial markets, however, economic activity in the United States inevitably revealed a sharp contraction earlier Wednesday morning as GDP declined 4.8 percent in the first-quarter. Intentions of continuing the purchase of Treasury securities and mortgage-backed securities were stated by FOMC to support the flow of credit to households and businesses. Moreover, overnight repo operations will also continue.

Fed Chair Powell Comments on Monetary Policy

Chair Powell noted the harsh impact on consumer spending and other impacts to the economy in his virtual press conference following the FOMC statement. The depth and duration of the current downturn will depend on the severity of COVID-19's spread. Regarding the balance sheet, Powell noted that treasury and MBS purchases will continue as necessary. Referencing demand for the Fed's facilities, Chair Powell noted that there is an ability to extend if demand calls for it, but the Treasury still has plenty of equity.

Gold Spot Price (Daily Chart)

Source: IG Charts

Turning to inflation, Chair Powell noted that they will keep a close eye on it when asked, but he believes it is unlikely. Nevertheless, a sharp decline in oil prices will likely have some effect on inflation moving forward and expectations in consumer surveys have ticked lower. Still, gold prices, a common hedge against inflation, remain near multi-year highs.

Economic Calendar - Euro Area

Source: DailyFX

The action-packed week will continue tomorrow with the ECB rate decision. Expectations call for no change in rates for the European central bank. However, like the Fed, market participants will key in on President Lagarde's commentary, specifically towards coronabonds and the future outlook in policy. A weaker US Dollar has bolstered EURUSD price action in recent weeks as risk-aversion pulled back.

EURUSD Price Chart (1-Hour)

Source: IG Charts