The Fed hiked rates by 25bps as expected. The only dissenter to the policy outlook was Bullard who called for a larger 50bps rate hike. Inflation forecasts were increased with the core seen to rise to 4.1% this year (from 2.7% prior) and the headline PCE to 4.3% (from 2.6% prior). Growth forecasts were cut to 2.8% from 4.0%, but forecasts for next year and beyond were left unchanged.

The future path of rates

The latest dot plot shows that there are now seven 25bps rate hikes expected this year, in line with the market projections.

This news quickly led to increased expectations of a 50 bps rate hike for May’s meeting as the Fed was perceived to have taken a hawkish tilt. The initial reaction to the decision was USD strength, equity selling, and gold and silver downside as could be expected from this hawkish outlook.

Going into the meeting the USD had been sold and there is a general consensus view that the USD tends to lose value. Here is some research from JP Morgan showing that pattern from the Financial Source team.

So, what does this mean? Well, the market has a bias to sell the USD and it could be construed that the hawkish FOMC decision was just not hawkish enough to change the outlook dramatically. Some analysts argue that traders just wanted the FOMC risk out of the way before starting to sell the USD and begin buying equities again. It is hard to see a clear direction here, but for now, USD weakness looks likely until we see otherwise.

The risk

This may well prove to be the correct view, but traders must also keep aware of the risk of stagflation. If growth starts to slow, but the Fed keeps hiking rates then that could be a catalyst for another down leg in stocks. It would also help the USD higher. So, there are still two-way risks here. What the Fed’s actions have told us is that they are very concerned about rising inflation and are prepared to act aggressively to contain it. The path from here for stocks is far from clear, but that in itself is a message for caution.