Stocks jumped to highs of the day before paring gains as they were cheered by what looks on to be a dovish Fed decision – critically it looks as though the Fed is happy to let the economy run really rather hot and won’t intervene. It’s truly remarkable that the Fed can say the economy will rebound by 6.5% this year and not change policy. Even with growth in excess of 3% in 2022 and 2% in 2023; it still sees no need to tighten policy. This reflects what we know already about the Fed’s view on employment and inflation, but it is no less remarkable for it. I would have expected more policymakers to move their dots in a bit, but the median plot did not move into 2023. Doves rule – there is not enough of majority yet seeing any need to act to raise rates. Over to Jay Powell.

• No hikes through 2023. 4 from 1 see a hike in 2022, whilst 7 see a hike by 2023
• Inflation is seen at or above 2% through 2023, including 2.4% this year, 2% in 2022 and 2.1% in 2023. This is perhaps a little light and if inflation starts to move significantly higher than this it will be a problem and yields could back up further. This is the primary risk now for the Fed as AIT lets inflation expectations become unanchored.
• Boosts GDP forecast to 6.5% in 2021 from December’s projection of 4.2%, with expansion seen at 3.3% in 2022 and 2.2% in 2023.

Initial market reaction showed a pop in stock markets – this may get cooled if the market thinks the Fed is losing its grip on inflation by letting the economy run so hot. The Dollar dropped sharply and has held the losses. Gold broke above $1.740. 10s trade more cautiously around 1.66%, still up over 4bps today.

Dots: no shift in the median: 4 of 18 see a hike next year, 7 in 2023.

December dot plot – just three moved into the 2023 camp.