Stimulus talks, rising Covid-19 cases, slowing employment recovery, and starting of vaccinations. Market expectations from FED are very mixed for today’s FOMC meeting because of the complex news flow as we have seen lately.
Current Economic Outlook
• Covid-19 is spinning out of control and more shutdowns will come not long after that. New York Governor already told that citizens should be ready for a total shutdown.
• Already weakened employment recovery is at risk as more shutdowns are on the way. People are already losing their unemployment checks due to the time limit and it will be going to get worse in the new year. Unpaid rents continue to increase homelessness risks.
• Fiscal stimulus package is still in the negotiations stage as it was for months. A lot of small to medium-sized businesses are in trouble. More shutdowns will increase default risks. But congress is started to give positive signals about finalizing the deal before the end of the year..
• Vaccinations are expected to start this week. This is a good development for the medium-term outlook.
• Mainly markets expect from FED to upgrade their guidance system. More than %50 of economists expect new guidance from the FED. If FED links its bond-buying program to certain economic conditions this may positively affect the markets.
• Increasing the volume of the bond-buying programs seems unlikely in this meeting. FED may choose to “hold and watch” approach and wait for if fiscal stimulus package to unfold. But Powell will probably mention that FED is ready to do more if needed.
• In Bloomberg’s survey, 2/3 of economists said that they are expecting FED to extend the average maturity of bond purchases before the end of 2021. %23 of economists expected this extension will come in today’s FOMC meeting.
• An economic projection update is highly likely. With the incoming vaccinations, FED may increase growth forecasts and decrease unemployment forecasts in this meeting. This improvement will probably be small and Powell will mention that economy is still weak and recovery will take a long time. But if we see a big improvement of projections, this may spook the markets because of “FED will do less in the future” expectations.
• Powell will probably mention the need for fiscal support again.
Ahead of FOMC, Dollar Index is testing the 90.000 support level. This support level may become key for incoming weeks’ price actions.