Fed Preview: Hints of reducing bond-buying to support the greenback

The Federal Reserve is set to leave policies unchanged but could hint of tightening. Will Powell power up the dollar? Yohay Elam, an Analyst at FXStreet, lays out three things to watch out for. 

Chair Powell may have a harder time dismissing inflation concerns

“The Fed Chair famously said that he is ‘not even thinking of raising rates’ – but is he thinking of slimming down bond buys? A non-denial would serve as a signal. For markets, that would mean a stronger dollar – fewer greenbacks printed means a higher value – and perhaps falling stocks. Conversely, if Powell clearly states that the Fed did not even discuss any such reduction to Quantitative Easing (QE), stocks could continue their festivities and the dollar would suffer.” 

“If Powell cheers the rapid return to work, markets would see it as a sign of a hawkish shift, sending the dollar up and stocks down. On the other hand, many are still out of work. If the Fed continues stressing that it wants to see many millions more returning before thinking of any sort of tightening, the dollar would soften and stocks could gain ground. It would imply more money-printing for longer.” 

“As of March, the Consumer Price Index jumped to 2.6% YoY while Core CPI advanced to 1.6%. At this point, there is nothing alarming to push the Fed into action. There is still room to rise before becoming worried and the Fed may opt to continue dismissing inflation worries. That would boost equities and weigh on the greenback.”