- The Federal Reserve's dot plot is signaling zero hikes through 2023.
- Markets foresee such a lift-off coming already in early 2022.
- Chair Powell will likely push back against an early move.
- Markets will likely ease up on a dovish message.
- The dollar may temporarily soften before resuming its long-term uptrend.
Hold your horses – or at least just a bit. Only seven out of 17 Federal Open Markets Committee members foresee a rate hike in 2023 and only four in 2022. That is a dovish outcome in comparison to market pricing of the first increase in borrowing costs coming in 2022.
The dollar is falling and stocks are rising. What does this mean for markets?
Will Federal Reserve Chair Jerome Powell change the picture? Probably not, as while he refused to promise interventions in bond markets, the world's most powerful central banker has repeatedly stressed that the US economy is a long way to recovery. It is all about the unemployed – roughly 9.5 million people who have yet to return to their pre-pandemic jobs.
Stocks have been suffering from brutal moves in yields. If returns on safe debt from Uncle Sam are rising sharply, shares become rapidly less attractive. However, gradual upside moves are welcome as they reflect a return to pre-pandemic growth, which is positive for Wall Street companies.
The Fed's message is supportive of the latter – gradual moves that allow shares to move up in tandem with yields.
For the dollar, it is another story – a difference between the short term and the longer one. In the short term, the pushback against raising interest rates is adverse for the value of the dollar.
However, the Federal Reserve's support of the economy joins President Joe Biden's $1.9 trillion stimulus bill – with trillions in infrastructure coming. Moreover, America's vaccine campaign is also moving at a rapid clip,
All in all, the US economy is set to grow fast – something the Fed has acknowledged in another part of its dot plot – and the greenback is set to rise. It is essential to note that ten-year Treasury yields have quickly recovered from their downside knee-jerk move. It is around 1.65% at the time of writing.
Will the dollar remain low if the US economy and yields surge higher? Probably not.
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