The vote was unanimous for like the market had fully priced. The knee jerk reactions saw bonds higher and the selloff as it was a pretty high bar to out-hawk what had already been priced in

There was a sigh of relief across markets that the Fed was not as harsh in its language as it could have been.

Stock market gains are a result of no policy surprise. Still, as importantly, there has been a considerable reduction in policy uncertainty which was a significant precondition for stocks to move higher. Investors seem okay with a steady cadence of 50 and 50 for the next two FOMC meetings after a pushed back against a possibility of a 75bp hike.

Oil

is higher due to the EU ban on Russian oil imports in the sixth package of Russia’s sanctions.

Although global crude flows will re-orient around the EU ban, sending more Russian Crude to China while surplus cargo from the Middle East and US tanker on to Europe. Nonetheless, we should expect a downswing in Russian production that will tighten the global market, keeping a floor on prices for the near future. 

The 240MB international SPR release dulled the sharp edge of the sanction’s bullish impulse. And the anticipated demand impact of the latest covid-linked mobility restrictions in China and growing recession risk are still damping sentiment and limiting a full-throttle rally.

Foreign Exchange

While pushing back on a 75 bp hike in July, Powell also touched upon the Ukraine and China as “two further negative shocks” that have hit the economy this year. The fact Powell mentioned these stressors suggests the Fed is concerned about exogenous shocks to the broader economy, especially with fiscal support fading. If you are looking for less hawk, you have it there but do not mistake it for a dove. 

The FOMC’s resolve to move policy to neutral as soon as possible summed up the USD’s strength. But with Powell pushing back against a 75 bp hike while acknowledging global risks, those were the two keen triggers for USD selling at Wednesday’s FOMC meeting.

However, the issue I see is that Powell’s tone is unlikely to pull breakevens or inflation swaps down. Indeed, quite the reverse. Lower real yields have pulled down the nominal yield, but the breakeven has soared 5bp. 

That can not be what the Fed wants, and it will bother the hawks and moderates on the board to no end when they survey the markets after yesterday’s meeting. Hence, I do not think the USD bulls will give up the plot just yet.

Outlook

The Fed has 50bp hikes in June and July to come. September, November, and December are (currently) on course to be 25s. That brings the policy range to 2.25-2.50%, bang in line with the Fed’s estimate of neutral. The markets see the Fed going another 100bp from there. Powell was a lot less committal. He said the Fed might need to go beyond and get restrictive, but it was not sure. The markets are always going to price the potential of the Fed going further than neutral, but on today’s evidence, the Fed merely endorsed a return to neutral this year, but not the market’s thoughts on what happens after that.