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USD In Focus After the FOMC Statement

July 30, 2020 By Mircea Vasiu

The much-awaited FOMC July meeting is finally behind us, and it brought some new twists to the Fed’s overall monetary policy. 

Once again, Fed’s Chair, Jerome Powell, gave a brilliant performance, highlighting the risks ahead during the pandemic.

What is new is that for the first time since the pandemic started, the Fed ties the economic recovery to the length of the virus. Up until now, the Fed did recognize the virus as an exogenous shock of immense proportions, but the COVID-19 did not make its way into the FOMC Statement.

That changed yesterday.

Economic Recovery Tied to the Path of the Virus

At the start of the pandemic, the Fed expressed moderate optimism that the economy might experience a V-shape recovery. A quick recovery after the initial shock was a possibility.

However, that feeling changed as the months went by. At yesterday’s press conference, Fed’s Powell stressed multiple times that the economic recovery will be gradual and that it depends strongly on the outbreak’s evolution.

Another important takeaway from yesterday’s press conference relates to job creation. More precisely, the Fed acknowledged that more than fourteen million people are still unemployed when compared to pre-crisis levels. Moreover, the likelihood that there will be jobs waiting for them anytime soon is very slim.

Finally, another major distinction relates to the Fed’s lending vs. spending abilities. Yes, the lending facility programs exist to offer support to eligible businesses that apply for a loan. However that is pretty much all the Fed can do with such programs – to expand them broadly so that many companies become eligible.

The Fed made it crystal clear that it understands that businesses would not borrow just to pay their employees to stay home. In other words, the Fed explained the limitations of the lending facility programs and why they are not so successful at this point. Instead, it stressed the importance of the fiscal support provided so far and the possible future ones.

In terms of the U.S. dollar’s volatility, not much happened during the FOMC Statement release and the press conference. The dollar entered the event at the lows of the day and exited it at similar levels.

Nevertheless, the focus on the next couple of days, the last trading days in June, shifts to the dollar. During yesterday’s press conference, the dollar moved hand in hand with the U.S. stock market – any decoupling due to the end of the month flows will leave investors vulnerable to a strong dollar move.