Ten hours later and I would wager that most of the market is still trying to wrap their heads around the Fed communique yesterday and what does that all mean moving forward. The market reaction has been less straightforward and that is making for a tougher time to digest everything so far.
The Fed hiked by 25 bps as expected, with Bullard the only dissenter (wanting a 50 bps move). The dot plots showed 7 rate hikes for this year with 4 more to follow in 2023. But the Fed did lower growth projections and upped its inflation forecast. And Powell's press conference was not too assuring I would say, though at least the door for QT is open for either May or June.
So, what exactly can we really take away from the FOMC meeting conclusion yesterday?
The Fed wants to believe that it is hiking rates to curb out-of-control inflation and keep the economic expansion going. Or at least that is what they want you to believe. That ties to my point here yesterday, that markets are seeing it as either the Fed goes with an aggressive tightening cycle or risk a recession.
The reaction in equities is perhaps telling with US stocks rallying towards the end of the day, though it is hard to really make sense of that when you pair it with the prospect of 2% rates by year-end.
That said, most of this is already somewhat ingrained into the market's thinking. Adding to that is the reaction in Treasury yields:
Yields surged ahead initially before coming back down and that does point to some uneasiness as to whether the Fed can go through with this tightening cycle without any hitches.
It's still early to gauge the overall reaction and we'll have to see how things play out in the coming days. So, I wouldn't jump to any conclusions just yet.
But in the bigger picture, it feels like the market is seeing what it wants to see. I talked about how while the Fed is trying to give the illusion that rate hikes can help with inflation and the economy, it really isn't going to do anything whatsoever.
I fear that is a reality that will become more evident in the coming months, more so with the yield curve flattening further post-Fed.
As for the dollar, it's tough to consolidate why the greenback continued to underperform yesterday (besides against the yen). But it would seem if a more hawkish Fed is failing to rile up the bulls, it will be tough if the Fed has to backtrack on its tightening cycle if the economic momentum grinds slower in the quarters ahead.
I mean, essentially that is what they are already expecting with dot plots showing lower rates in the "long run".
