The US labor market is “strong”, inflation is “well above” the target level and balance sheet runoff could be combined with interest rate hikes - these are the three key takeaways from the Fed meeting. We can conclude from them that the Fed's lead, in terms of intentions to tighten policy, has only increased compared to its peers, Central Banks of other major economies. As a result of the meeting, the baseline forecast for the terminal level of rates at the end of 2022 shifted from the range of 100-125 to 125-150 bp, according to interest rate futures:
The dollar is crushing opponents today – DXY, after breakout of the local high at 96.50, and thanks to a more balanced position after the recent correction, is already challenging the resistance at 97 points. And although the Fed has clarified the trajectory of rates in 2022, and it may seem that the dollar rally risks fizzling out soon, passive stance of other central banks may continue to fuel demand for the US currency (in particular, this will become clear next week after the ECB meeting), as well as speculation that the Fed will move the rate in March by 50 bp instead of 25 bp.
Interestingly, at the press conference, Powell combined comments such as "outlook is uncertain" and "I think we have quite a bit of room to raise interest rates without threatening the labor market". By the way, the last comment was probably the true cause of a negative reaction in risk assets, as it became clear that 2-3 hikes may not be enough for the Fed.
Other hawkish moments include reappraisal of inflation from “having exceeded 2 percent for some time” to “well above” the target and the labor market from “approaching full employment” to “strong”. In general, this suggests that the Fed should confidently raise rates and one or two weak macro updates will probably not be enough to tamper its hawkish stance.
A popular harbinger of a recession, the spread between 10 and 2-year US bonds has fallen to a minimum since November 2020 mainly due to spike in short-term yields post-Fed while long-term bond yields barely moved indicating concerns about potential Fed’s overtightening:
In the near future, currencies where interest rates are still low or central banks signal reluctance to respond to inflation are likely to be more vulnerable to a strengthening dollar than currencies correlated with risk demand or business cycle fluctuations, as the Fed has signaled that the economy is in good shape, which means that expectations for the global economy will be about the same. Therefore, considering possible short opportunities in the pairs with the dollar, then EUR, JPY and CHF could be apt candidates.