US stimulus deal close as Fed optimistic

Fed maintains current easing measures

Stock markets remain buoyed heading into the end of the week after the Fed held off on new easing measures on Wednesday.

The central bank did commit to maintaining its already highly accommodative stance for longer than it previously had though, so I guess this was an easing, of sorts, albeit not the knockout blow many had hoped for.

But, armed with fresh economic forecasts which present a much rosier outlook for the economy, the central bank clearly believed that the current stance was appropriate, with Powell even stressing that the impending fiscal package would be more appropriate for the current situation.

With interest rates already so close to zero and the balance sheet expanded dramatically since the onset of the pandemic, any action was only going to have marginal benefits. Although with long-term rates rising in recent months, there have been calls for the Fed to do more to reverse the trend. Perhaps it will if the trend continues into next year but for now it’s comfortable and yield curve control is on hold.

It’s over to lawmakers on Capitol Hill to do their part now after months of negotiations that at times appeared to be going nowhere. The package is much smaller than the Democrats were pushing for but contains all essential support that both sides have long agreed upon. More negotiations may be needed once the new administration is in place and the final two Senate seats have been decided.

It seems a US stimulus deal will be done before a Brexit one, with the two sides converging on an agreement but significant issues still remaining. Time is fast running out and already it seems any deal will have to be rushed through in a vote, with MPs recalled from the Christmas break, which begins today.

The important thing is that it continues to look like a deal will be done despite all of the noise in the media as both sides try desperately to secure final concessions. The pound is back at two and a half year highs against the dollar, a clear sign of the confidence in a deal getting over the line. A failure to do so at this point would be a major blow for the currency, not to mention the UK economy.

The Bank of England meets today and will announce its latest monetary policy decision. With the central bank having announced new bond-buying only last month, today should just be a formality as policymakers await the outcome of the negotiations, like the rest of us.

For a look at all of today’s economic events, check out our economic calendar. www.marketpulse.com/economic-events/

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