# What’s in a Dot? Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2021-06-22 Category: BUSINESS Category URL: https://financedigest.com/category/business Meta Title: US Federal Reserve Meeting Shakes Markets: Rate Hike Meta Description: Last week's Fed meeting revealed surprising rate forecasts and market reactions. Get insights on the impact on bonds, currencies, and equities. URL: https://financedigest.com/whats-in-a-dothtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/img7382-2062-1736838269719-compressed.jpg) _By **Rupert Thompson,** Chief Investment Officer at Kingswood_ Markets last week were dominated by just one event – the meeting of the US Federal Reserve on Wednesday which caught investors on the hop. The Fed updates its economic and interest rate forecasts once a quarter and these were the source of the surprise. The infamous ‘dot plot’ showed 13 out of the 18 [Fed members now projecting one or more rate](https://www.financedigest.com/oil-dips-as-potential-fed-rate-hike-overshadows-falling-stocks.html "Oil dips as potential Fed rate hike overshadows falling stocks") increases by end-2023, up from seven back in March. More importantly, the median forecast is now for two [rate hikes](https://www.financedigest.com/stocks-bonds-extend-rally-on-hopes-rate-hikes-ease.html "Stocks, bonds extend rally on hopes rate hikes ease") in 2023, versus none before. This shift accompanied a substantial [upward revision of the Fed’s inflation](https://www.financedigest.com/french-inflation-revised-upwards-in-february-to-7-3-final-figures.html "French inflation revised upwards in February to 7.3% – final figures") forecast for this year to 3.0% on the back of the surge seen in April and May. The Fed, however, continues to believe the bulk of this [rise will be temporary and left its central forecast for next](https://www.financedigest.com/britains-next-sticks-to-outlook-after-quarterly-sales-rise.html "Britain’s Next sticks to outlook after quarterly sales rise") year broadly unchanged at 2.1%. Chair Powell was also at pains to emphasise the dot plot just represents the forecasts of individual members, is not an official Fed [forecast and should be taken with a big grain](https://www.financedigest.com/traders-cut-ukraine-2022-combined-grain-and-oilseeds-crop-forecast.html "Traders cut Ukraine 2022 combined grain and oilseeds crop forecast") of salt because of the uncertainties. Indeed, the spread of forecasts is striking. Five [Fed members are forecasting four or more rate hikes](https://www.financedigest.com/stocks-euro-gain-amid-divergent-fed-ecb-rate-hike-outlooks.html "Stocks, euro gain amid divergent Fed, ECB rate hike outlooks") by end-2023 at the same time as another five expect no change in rates at all. The bottom line is that the first US [rate hike now looks set](https://www.financedigest.com/bank-of-england-set-to-hike-to-4-as-rate-peak-looms.html "Bank of England set to hike to 4% as rate peak looms") for 2023, rather than 2024. A more immediate issue is whether the start of QE tapering has also been brought forward and the answer is probably not. The Fed is now talking about tapering, rather than just ‘talking about talking about tapering’, but that is as far as it goes. It should spell out its [plans over coming months and the most likely start date remains early](https://www.financedigest.com/exclusive-microsofts-bing-plans-ai-ads-in-early-pitch-to-advertisers.html "Exclusive-Microsoft’s Bing plans AI ads in early pitch to advertisers") next year. So how did the markets react to all of this? Starting with bonds, 10-year Treasury yields somewhat surprisingly ended the week [little changed at 1.45% despite the Fed](https://www.financedigest.com/analysis-weary-investors-see-little-respite-to-fed-hike-gloom.html "Analysis-Weary investors see little respite to Fed hike gloom") shock. However, the [yield curve](https://www.financedigest.com/world-shares-rise-u-s-yield-curve-inverts-after-strong-jobs-data.html "World shares rise, U.S. yield curve inverts after strong jobs data") flattened significantly. Yields on shorter dated bonds rose, due to expectations of earlier Fed tightening, while those on the longest dated bonds fell, due to reduced [worries of a major sustained inflation](https://www.financedigest.com/dollar-stronger-as-inflation-worries-dampen-risk-sentiment.html "Dollar stronger as inflation worries dampen risk sentiment") overshoot. The [market has in fact not believed the Fed](https://www.financedigest.com/markets-start-signalling-fed-may-be-going-too-far-amundi.html "Markets start signalling Fed may be going too far – Amundi") for a while and for several months has been pricing in two rate rises by end-2023. Now, it has once again moved [ahead of the Fed](https://www.financedigest.com/cyclicals-bat-drag-ftse-100-lower-ahead-of-fed-decision.html "Cyclicals, BAT drag FTSE 100 lower ahead of Fed decision") and is building in three hikes. Even so, we continue to believe that yields will [head higher](https://www.financedigest.com/wall-st-heads-higher-as-fed-rate-hopes-dent-dollar.html "Wall St heads higher as Fed rate hopes dent dollar") later this year, albeit not by a massive amount. As for other asset classes, the [dollar bounced](https://www.financedigest.com/dollar-bounces-as-fed-seen-keeping-up-aggressive-rate-hikes.html "Dollar bounces as Fed seen keeping up aggressive rate hikes"), reversing its losses of recent weeks, and the gold price dropped, unwinding its gains of late. Neither move was a [big surprise and we don’t expect either to be sustained](https://www.financedigest.com/big-brands-set-to-miss-plastic-sustainability-targets.html "Big brands set to miss plastic sustainability targets") for too long. Moving onto equities, the overall reaction was limited with [global markets down 1.2% in local currency terms over the week](https://www.financedigest.com/global-equity-funds-see-biggest-weekly-outflow-in-five-weeks.html "Global equity funds see biggest weekly outflow in five weeks"). But the impact at the sector/stock level was considerably more pronounced, with this [year’s ‘reflation’ trade](https://www.financedigest.com/uaes-adnoc-to-open-swiss-trading-office-next-year.html "UAE’s ADNOC to open Swiss trading office next year") going into reverse. Cyclicals underperformed [technology and defensives while value stocks](https://www.financedigest.com/chatgpt-mania-pumps-up-chinese-ai-technology-stocks.html "ChatGPT mania pumps up Chinese AI technology stocks") lagged growth stocks. We believe this is just a temporary setback for the rotation into value. We plan to use the opportunity to increase our exposure to this area and the more cyclical sectors such as materials, [energy and financials](https://www.financedigest.com/the-future-of-finance-in-the-energy-industry.html "The future of finance in the energy industry"). At the end of the day, the shift in Fed policy is not that great and the environment over coming months remains one of strong growth, increased [inflation pressures](https://www.financedigest.com/analysis-china-central-bank-under-pressure-to-ease-is-hemmed-in-by-inflation-fed-jitters.html "Analysis-China central bank, under pressure to ease, is hemmed-in by inflation, Fed jitters") and rising bond yields – all factors supportive of these areas of the market. UK equities suffered last week, both from the move out of value and a [fall in the pound against a stronger dollar](https://www.financedigest.com/dollar-falls-to-nine-month-low-as-powell-notes-progress-in-disinflation.html "Dollar falls to nine-month low as Powell notes progress in disinflation") to $1.38. However, with both factors expected to be only temporary, the UK remains one of our [favoured markets](https://www.financedigest.com/total-allowable-catches-tac-and-fishing-quotas-across-the-world-turning-favourable-for-the-global-mackerel-market-sales.html "Total Allowable Catches (TAC) And Fishing Quotas Across The World Turning Favourable For The Global Mackerel Market Sales"). Meanwhile, UK inflation surprised on the upside in May, [rising to 2.1%](https://www.financedigest.com/bitcoin-rises-2-1-to-reclaim-50000.html "Bitcoin rises 2.1% to reclaim ,000") from 1.5%, and looks set to head up to 3% later this year. But the BoE, just like the Fed, believes the [current pick-up is temporary and it is unlikely to prompt a significant policy change](https://www.financedigest.com/pharmaceutical-contract-packaging-market-current-impact-to-make-big-changes-2020.html "Pharmaceutical Contract Packaging Market Current Impact to Make Big Changes 2020"). Compared to the [Fed meeting](https://www.financedigest.com/german-gloom-dampens-stocks-as-fed-ecb-meetings-beckon.html "German gloom dampens stocks as Fed, ECB meetings beckon"), the MPC get-together this Thursday looks set to be a rather dull affair. --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---