The market is betting on another rate cut, and even the tough statement from the Federal Reserve cannot shake their confidence.

Overnight, the Federal Reserve kept the interest rate unchanged at a record high for more than 20 years, and lowered its expectations for a rate cut this year. Nearly half of the FOMC officials expect only a 25 basis point cut. Powell reiterated at a later press conference that the Fed does not have plans to cut interest rates and will continue to observe more evidence to ensure that inflation is developing as expected.

However, the market did not pay attention to this hawkish position. The CPI released earlier showed a cooling of inflation, and the year-on-year core CPI in May fell to a three-year low. This prompted the market to increase their bet on two rate cuts this year, with the first rate cut coming as soon as September.

The market celebrated, with both US stocks and bonds rising. The two-year US bond yield fell as much as 17 basis points to a low of 4.67%, and the S&P 500 index rose as much as 1.3%. After the end of the Fed meeting, the market maintained its momentum, showing little reaction to Powell's hawkish comments.

In recent years, the market has repeatedly over-speculated that the Fed is about to change its course, only to suffer heavy losses when the Fed follows its usual path.

However, the Fed has made it clear this time that once it is confident that inflation is firmly falling back to the 2% target, it will begin to cut interest rates.

Bloomberg strategist Cameron Crise said:

A CPI data that is much lower than expected has made traders buy assets frantically. This reaction is understandable, as the key indicator core CPI has suddenly changed.

But on the surface, the Fed's dot plot and economic forecasts are quite hawkish, with inflation expectations raised and the median federal funds rate for 2024 firmly at 5.125%.

Even so, the hawkishness of the dot plot (in terms of the response function) is not as strong as in previous times. If the inflation trajectory continues to decline, the Fed may shift towards a more moderate stance, which seems to explain the market's appropriate response to the CPI data.

Powell also seems to agree with the market's interest rate forecast and downplayed the importance of the dot plot, saying that the actual path will depend on future economic data. He mentioned that the May inflation data is "welcome," and officials hope to see more such data. George Goncalves, head of macro strategy at MUFG Americas, said:

Powell behaved more hawkish, just trying to shift the focus away from the timing of the first rate cut.

Editor/Somer