The Fed inarguably delivered a surprise on Wednesday by raising the dots plot to signal a year-end rate of 5.6% and the initial reaction was what you would expect — selling of risk assets and buying in the dollar. However after some time to digest, the market shrugged off the Fed. The dollar gave back gains and stocks returned to unchanged.
Why is the market unworried about higher rates?
For one, the market has seen many dot plots and knows they’re hardly set in stone. Financial markets have been seeing emerging signs of disinflation and there is good reason to believe that will continue. Even for July, where a hike is well-telegraphed, the market is only pegging the odds at around 60%. The thinking is that stronger signs of economic weakness are inevitable and will dissuade the Fed.
Perhaps more important is that the market doesn’t see a big difference between 5.1% and 5.6% so long as there is a degree of confidence that the economy is ok. With China showing signs of stimulating and the AI boom ongoing, there’s plenty of reason for optimism.
So the bottom line here is that the Fed just doesn’t matter that much right now.
