Fed React: Dot plots send Short-Term yields and dollar higher

US stocks tumbled after the Fed’s dot plots told Wall Street it was the last call for stimulus trades.  The dollar soared as short-term Treasury surged after Fed Chair Powell signaled inflation has increased notably and will likely remain elevated before moderating.  The Fed finally had a ‘talking about talking about’ meeting, but financial markets seem confident the Fed already has a progress-dependent tapering plan in mind. 

The S&P 500 index pared some of the post-Fed statement/projections after Powell’s press conference delivered a handful of dovish reminders: vaccinations have a ways to go, that the base case is still that inflation is driven by reopening momentum, and that they are ways away from substantial further progress. 

Fed

The Fed kept the target range unchanged between 0.00-0.25%, raised interest it pays on excess reserves (IOER) from 0.1% to 0.15%, and delivered a very hawkish dot-plot forecast.  The Fed statement was filled with optimism given the success in getting Americans vaccinated and recent robust economic activity, but still carried some cautiousness that the economy is still not out of the woods. 

The dots showed three more policymakers joined the four in March in supporting a rate rise in 2022.  Now 13 of 18 Fed officials support at least one rate hike by the end of 2023, with the median forecast showing two rate increases.    Financial markets are still expecting the first full Fed rate hike by the end of 2022.     

FX

Currency traders are giving the dollar its crown back.  The dollar surged today after the Fed showed a much quicker rate hike schedule.  The Fed was mostly expected to stay the course, but today’s optimistic FOMC statement and forecasts shows the economy is making progress towards their goals.  The dollar was ripe for a rebound, but the beginning of a longer-term this is not.  The Fed will still remain highly accommodative for the rest of this year and most of next year, which will still allow the major central banks to move well in advance.    

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