A Dovish Fed Could Be the Positive Market Catalyst That Holds
The combination of the Fed's latest statement, a reprieve from tariffs and progress in the Ukraine/Russia conflict is boosting the market.
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The Fed decreased its growth forecast for 2025, increased unemployment rate expectations and increased inflation.
It changed the language enough and the dots enough that a market, that was possibly looking for a hawkish Fed, felt the need to buy stocks and bonds.
The statement and presentation struck me as more or less neutral to slightly dovish. Fed Chair Jerome Powell did seem slightly more dismissive on questions regarding inflation risks and seemed to give more credence to questioning the economy. But even there, he is certainly not in the recession camp and its end of 2024 unemployment rate of 4.4% is probably still in and around any measure of “full” employment.
While the dots in later years moved down, I like to look at the average dots for this year. In times of so much uncertainty, I want to see what they are thinking with a tighter time horizon.
The weighted average dot plot for this year moved from 3.83% to over 4% versus December 2024. That is basically half of a cut taken out. We had three people at 3.625%, one at 3.375% and one at 3.125% at the end of December. We now have “only” two people at 3.625% and none lower. Last December, there was a single person at 4.375% and three at 4.125%. Now there at four at each of those rate levels. Since we cannot attribute the projections to any one person, it is a bit tricky to compare (and I believe it isn’t even all the same people this year versus last year who submit their projections).
Whatever the messaging said and future dots said, this year’s dots seemed to solidify at two cuts maximum, rather than at least two cuts (that is how I interpret the data). That may weigh on markets in the coming days.
There were two other positives that came out today:
- On the Fed front, is is reducing its balance sheet reduction on the treasury side, allowing a maximum of $5 billion a month to roll-off. Presumably, they will need to re-invest and will take some duration out of the market (they typically reinvest by participating in that month’s auctions of new bonds).
- Apparent progress on some sort of ceasefire between Russia and Ukraine. While it still seems to skew to Russia getting what it wants, the U.S. getting what it wants (resources and mention of U.S. ownership of power plants), but there was some chatter about air defense systems. Given the way things have been going, that is likely helping markets for now, as well.
The one positive that didn’t happen today:
- No big tariff headlines
The combination of a Fed perceived to be more dovish than was apparently priced in, some semblance of progress with Ukraine/Russia and no tariff headlines is helping markets.
I’m highly dubious that all three of those catalysts will hold. The Fed, maybe. Now that the quiet period is over, we will get a good idea of where the Fed is trying to guide the market.
I’m less convinced on tariffs, though as we near April 2, and there is some silence, we might get a reprieve there as well.
Definitely some things moving in the right direction, so we cannot be as bearish as before, but I think it ultimately comes down to the next phase of tariffs, and launching global reciprocal tariffs will be more than the market can handle.
