FOMC: more dove than hawk

FOMC: more dove than hawk

The Fed meeting delivered a dovish surprise that has been welcomed by stock market bulls. They kept rates on hold, and as expected, they revised down their outlook for growth and revised up their outlook for inflation. This does not sound like the basis for a dovish surprise; however, Jerome Powell was able to spin the latest Fed projections and stunned the market when he said that inflation would be ‘transitory’.

Is the Fed betting on temporary tariffs?

The Fed revised up core PCE inflation for 2025 to 2.8% from 2.5%, and for headline PCE to 2.7% from 2.5%. The outlook for inflation for 2026 was mostly unchanged. Either the Fed thinks that tariffs will be short-lived, or they think that tariffs will be transitory, and President Trump could roll back on tariffs in the coming months.

An uncertain outlook

The Fed’s Dot Plot signaled that FOMC members scaled back their expectations for rate cuts for this year and next, however, chairman Powell said that the outlook for rates was uncertain. The median expectation of FOMC members is that interest rates will be between 3.9% - 4.4% this year, up from 3.6% - 4.1% in December. The Fed is looking for just one cut this year, however, the market is mostly ignoring these expectations. There is still just over 2 cuts priced in by the Fed Fund Futures market, and it has lowered its expectations for interest rates by the end of this year to 3.68%, down from 3.73% on Tuesday.

Jerome Powell said that the FOMC is at the place where they can ‘cut or we can hold’, crucially the Fed chair did not say that they could also hike rates. This is another dovish signal from this meeting.

S&P 500’s stunning rally

The outcome of this meeting is not what traders had expected this morning. The S&P 500 is higher by 1.4%, and if it can hold onto these gains by the US close, this will be the best performance of the S&P 500 on a Fed decision day since 2022.

Powell’s reassurance for financial markets

Ahead of this meeting, the ‘Fed Put’, where the Fed cuts interest rates in response to a stock market sell off, was considered dead. While it was not revived at today’s meeting, Jerome Powell appeared to go out of his way to reassure financial markets. He resurrected the term ‘transitory inflation’, he also dismissed concerns around the sharp decline in consumer sentiment and the rise in consumer inflation expectations. This is not Powell’s ‘whatever it takes’ moment, but his nonchalant tone around the risks to the US economy, have had a big impact on market sentiment.

Although Powell said that soft  survey data cannot be ignored, he also said that it is the hard economic data that determines Fed policy decisions. This statement has eased fears about the US growth outlook, which is reflected in the rally in stocks since Powell started talking. 

Dollar rises, as inflation outlook revised higher

However, FX traders are not jumping on the risk-on bandwagon. The dollar is mostly higher across the board on Wednesday,  especially vs. the euro, and EUR/USD has fallen below the key $1.09 level on Wednesday evening. This suggests that FX traders have grabbed at the higher interest rate outlook included in the latest Dot Plot. However,  Treasury yields have fallen on the back of this Fed meeting, which could limit dollar upside in the coming days.

Gold reaches a fresh record, as inflation concerns bite

Interestingly, gold is also rallying alongside stocks, and it has reached a fresh record high this evening. This suggests that commodity traders are concerned about the inflation outlook, since gold is a traditional inflation hedge.

Overall, today’s meeting could help stocks and other risky assets to stage a short-term recovery. However, the rally in gold and in the dollar suggests that concerns remain in some sectors of the market. However, we think that the Fed does not have the power to move markets in the medium term, because there are still lots of unknowns about the President Trump’s tariff policy.