The Fed hiked 25bps as fully expected and the statement had 3 key highlights:

1. Hawkish - keeps "ongoing increases" (plural) language signaling no pause in March.
2. Small Dovish - adds inflation "has eased somewhat" but notes "remains elevated."
3. Dovish - Changes "pace" of future increases with "extent", as it transitions from the rate of hikes to the duration of higher rates before any pivot.

As Inflation Insights suggests:

"The one word change from the ‘pace’ of future rate hikes to the ‘extent’ of future hikes tells you that when the Minutes come out, we’ll likely read that officials have begun to debate when to pause."

While everyone expects a 'hawkish' rhetoric from Powell in the presser, we suspect it won't be 'hawkish' enough.

***

Since the last FOMC meeting on December 14th, a lot has changed for markets. While the dollar is lower and bonds are flat; gold, stocks, and crypto have all rallied strongly in an 'easing'-like move...

Source: Bloomberg

...but not a lot has changed for the market's view of the Fed's rate-trajectory (in fact, they have shifted hawkishly since the actual FOMC day close)...

Source: Bloomberg

But while rate expectations have drifted hawkishly, financial conditions have eased dramatically, equivalently erasing 100s of bps of rate-hikes and QT along the way....

Source: Bloomberg

Additionally, in case you were hoping for the 'soft' landing, since the last FOMC meeting, the labor market has dramatically outperformed expectations while 'soft' survey and 'hard' industrial data has significantly weakened (and perhaps today's ADP disappointment gives us a glimpse of reality... not weather)...

Source: Bloomberg

Finally, before we get to the fun and games, bear in mind that there is no SEP (dotplots) today, so Powell will be on his own to jawbone any rate-trajectory expectations (which for now remains massively more hawkish than the market...

Source: Bloomberg

As the FOMC statement hit, the odds of a 25bps hike in March were 79% and 46% for another 25bps in May...

So what did The Fed do?

The Fed hiked rates by 25bps to the 4.5%-4.75% target range.

The key sentence was unchanged (leaving "increases" (plural) in is hawkish)...

"The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time."

This language suggests The Fed is inclined toward quarter-point rate hikes at next two meetings in March and May, rather than toward a pause after March.

There was a very modestly dovish nod to the progress:

Inflation has eased somewhat but remains elevated.

Finally, in a dovish changes, The Fed nodded toward 'duration' of higher rates as opposed to 'how high':

...will consider “extent of future increases,” a slight change from the prior language on the “pace” of hikes

The market is anticipating Powell to be 'hawkish' in the conference call... but believes his rhetoric is 'all bark and no bite' - we shall see.

As Dennis DeBusschere, founder of 22V Research noted:

“As always, wait for the press conference, and in particular, how much Powell focuses on pain. The need for the economy to take some pain, or not. At the last meeting, he was very pain-focused.”

Read the full redline below:

(Click on image to enlarge)

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