SignalPlus Macro Analysis (20240321): Fed "Dovish Hold"

After the Bank of Japan perfectly executed a "dovish rate hike," the Federal Reserve followed with a "dovish hold." In light of the recent rebound in inflation, the market is very concerned about how the FOMC will respond. Chairman Powell conveyed an ambiguous dovish message, essentially stating that even if economic growth and inflation exceed expectations, rate cuts will be considered.

The market quickly noticed that despite significant increases in core PCE (rising from 2.4% to 2.6%), real GDP growth (rising from 1.4% to 2.1%), and unemployment rate (rising from 4.0% to 4.1%, with the official statement removing the wording "moderate"), the median in the dot plot remained unchanged (2024 federal funds rate at 4.6%). Although the Fed also raised the 2025 terminal federal funds rate from 3.6% to 3.9%, the Fed has essentially "revealed its hand," and this move is unlikely to stop the rise of risk assets.

Dovish sentiment only increased as the Q&A session began. Powell downplayed the recent inflation exceeding expectations through a series of subtle comments:

• While acknowledging that January and February inflation data exceeded expectations, the FOMC believes that the path to slowing inflation will be "bumpy."

• Powell clearly stated that the "overall narrative has not changed" since the December FOMC meeting.

• The FOMC expects to slowly and unevenly achieve the 2% inflation target "over time."

• The committee "did not overly celebrate good inflation data," and they will not "overreact to bad inflation data" now.

• The committee still anticipates that a rate cut will be appropriate "at some point this year."

• While acknowledging more "upside risks" to inflation forecasts, Powell also mentioned downside risks in the labor market to provide balance, thus supporting a dovish narrative.

Regarding the reduction of the balance sheet, the Fed did discuss that it will soon begin to slow down, but also warned that quantitative tightening will not end prematurely, just to ensure a smoother transition in the funding markets.

As expected, risk markets were buoyant around the FOMC press conference, with a steep bull flattening in U.S. Treasuries (2-year yield down 7 basis points, long-term unchanged), U.S. stocks rising 1%, closing at a new high, and the probability of a rate cut in June rising to > 70%. The market is pricing in nearly two rate cuts before September, with financial conditions easing to the most accommodative levels in the past three years.

The Fed has thrown caution to the wind, and the risk party seems to be making a comeback. The threshold to force a significant shift in the Fed's stance is higher than ever. If the labor market softens in the coming months, it could endorse the Fed's dovish tendencies. Unless several months of CPI/PCE data exceed expectations, the market will not question whether the Fed has misjudged the inflation situation. In the current risk context, the bearish fundamental view faces unprecedented challenges.

As TradFi sentiment now greatly influences cryptocurrencies, we are also seeing a similar surge in risk sentiment in the crypto space, with prices rising about 10% in the past 24 hours. Additionally, the recent drop of BTC from $73,000 to $61,000 led to a significant liquidation of long futures, resulting in cleaner positions than a week ago. Therefore, in the short term, the risk-reward may lean more towards price increases, potentially creating new historical highs.

Gold ETFs are also not to be outdone, experiencing one of the largest single-day inflows in recent years. The Fed's latest "dovish confirmation" should also provide further momentum for precious metals to rise in the short term.

Is it time to close our eyes and buy everything? Let's enjoy the party for now!

Finally, Powell reiterated comments made a few weeks ago during congressional testimony, continuing to downplay the likelihood of an upcoming central bank digital currency. Although he acknowledged that the central bank "needs to understand" digital currencies, the assertion that the Fed is planning to launch a central bank digital currency is "incorrect," and Powell himself has "not made" any decisions on the matter. Therefore, it can be said with a fair degree of certainty that the worst Orwellian scenarios are far from reality, allowing us to continue building digital infrastructure for the foreseeable future, hoping that this situation lasts as long as possible.