They say investors found what they needed in this FOMC meeting: improvement in fundamentals and no early signs of tapering in liquidity injections.
The Fed has made it clear that it sees the improvement that all investors are seeing and responding to. However, no mention has been made of the danger of rising rates or uncontrolled inflation. The rise in inflation is “transient”, that in our view is the keyword of this meeting. As long as the Fed does not see a longer-lasting growth acceleration, it will not believe in a longer-lasting inflation wave. When asked about a potential tapering, the answer was clear: “not now”. Goldilocks here we come.
This is visible in the market reaction tonight – with stocks up to record highs on Wall Street, and the dollar down.
Markets have been served with better growth, controlled inflation expectations and no changes to accommodation for the foreseeable future. The initial reaction weighed on the US dollar, pushed equities 1% higher than their intraday lows while yields on 10-year Treasuries were a touch softer.
The S&P 500 is back to historical highs of 3960, 10-year yields are at 1.66% after reaching 1.685% earlier in the day (their highest level since February last year) while inflation breakevens continued to creep higher around the 2.3% level.