SignalPlus Macro Analysis (20240321): The Fed "maintains its dovish stance"
After the Bank of Japan perfectly executed the dovish interest rate hike, the Federal Reserve also adopted the dovish maintenance policy. Faced with the recent rebound in inflation, the market is very concerned about how the FOMC will respond. Chairman Powell conveyed an ambiguous dovish message. , basically said that even if economic growth and inflation are higher than expected, interest rates will be cut.
The market was quick to notice that although core PCE (up to 2.6% from 2.4%), real GDP growth (from 1.4% to 2.1%) and unemployment rate (from 4.0% to 4.1%) were removed from the official statement moderate wording) have increased significantly, but the median of the dot plot has not changed (the federal funds rate in 2024 is 4.6%). Although the Federal Reserve has also raised the final federal funds rate in 2025 from 3.6% to 3.9%, the Fed In fact, it has almost showed its trump card, and this move will hardly prevent the rise of risk assets.
Dovish sentiment continued unabated heading into the QA session, with Powell downplaying recent inflation surprises with a series of subtle comments:
While acknowledging that January and February inflation data exceeded expectations, the FOMC also believed that the road to slowing inflation will be bumpy.
Powell made it clear that the overall narrative has not changed since the December FOMC meeting.
The FOMC expects a slow and meandering path toward its 2% inflation target over time.
The committee did not overly celebrate good inflation data, and now they will not overreact to bad inflation data.
The committee still expects a rate cut to be appropriate at some point this year.
While acknowledging that there are more upside risks to the inflation forecast, Powell also cited downside risks to the job market as a counterweight to the easing narrative.
Regarding shrinking its balance sheet, the Fed did discuss that it would begin to slow down soon, but also warned that quantitative tightening would not end early, just to ensure a smoother transition in capital markets.
As expected, the risk market sentiment was high before and after the FOMC press conference. The bullish trend of U.S. bonds (2-year yield -7 basis points, unchanged for the long term), the U.S. stock market rose 1% and closed at a new high in June. The probability of interest rate cuts has risen to >70%, with the market pricing in nearly two interest rate cuts before September, and the financial situation relaxing to the loosest level in the past three years.
The Fed has thrown caution to the wind, risk parties appear to be back, and the bar to force a U-turn on the Fed is now higher than ever before. If the job market weakens in the coming months, it will be able to endorse the Feds easing bias, and Unless CPI/PCE exceeds expectations for several months, the market will not question whether the Fed has miscalculated on inflation. In the current risk context, the fundamental bear market view has been challenged as never before.
With TradFi sentiment weighing heavily on crypto right now, we are seeing a similar surge in risk sentiment on the crypto side, with the price up around 10% in the last 24 hours, in addition to the recent decline in BTC from $73,000 to $61,000 , resulting in the liquidation of a large number of long futures, and current positions are cleaner than a week ago, so the risk reward in the short term is likely to be more tilted towards higher prices and possibly new all-time highs.
Not to be outdone, gold ETFs saw one of their largest single-day inflows in the past few years, and the Feds latest dovish confirmation should also provide further impetus for the precious metal to move higher in the short term.
Is it time to close your eyes and buy it all? Let’s just enjoy the party first!
Finally, Powell reiterated comments he made in testimony to Congress a few weeks ago, continuing to downplay the possibility of an imminent launch of a central bank digital currency. Although he acknowledged that central banks need to understand digital currencies, the suggestion that the Fed was planning to launch a central bank digital currency was false. ” and that Powell himself made “no decision at all” on the issue. So its fairly safe to say that the worst-case Orwellian scenario is far from here and well be able to continue building digital infrastructure for the foreseeable future, hopefully for as long as possible.
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