What did we learn from the Fed last week?

Fed in focus

The rate was unchanged 0.25% and QE was unchanged at $120 billion per month. Here were the key takeways:

  1. The dot plot changed slightly with more board members seeing sooner interest rate rises. However, the crucial point is that the median dot plot still sees no interest rate rises until 2024. See here to understand how the Fed uses the dot plot. Although the continued rise higher in yields post FOMC is showing the market is focused on sooner than expected rate hikes for now.

The latest dot plot from March 17: Still no rate hike until 2024

Fed in focus

2. Some upward projections for growth and inflation and reductions in unemployment expected. The main message from Powell was that ‘the very worst economic outcomes had been avoided’

  • GDP for 2021 revised UP to 6.5% from 4.2%
  • Unemployment for 2021 revised DOWN to 4.5% from 5.0%
  • Inflation revised up to 2.4% from 1.8%

3. Fed rejected calls to start to talk about tapering

In summary the Federal Reserve stuck to the dovish script. Still no rates expected until 2024. That’s what the Fed think.

However, the market is not so convinced. Eurodollar futures see a rate hike on March 2023 and three rate hikes for that year. See Justin’s post here the morning after the FOMC. Also US 10 year yields shot higher the next day and the rise has continued. So, the market is pushing ahead with the ‘coming interest rate rise’ story.

The USD should find buyers again on pullbacks lower as the outlook for a faster US recovery is still underway. It’s just that the Fed is wanting to not see US 10 year yields rise too fast, too quickly.

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