Dovish Pause

The Market Ripped +1.5% in 60 minutes...here's why

Why Did the VIX close below 20 for the first time since February 28th?

The Federal Reserve is arguably the most powerful force in markets because of its Monetary Tools, which control the supply and cost of money. Although Wednesday's meeting did not result in a much-anticipated "RATE CUT SIGNAL," it did result in comforting words and a huge reduction in balance sheet run-off.

The markets' worst fear is that tariffs result in stagflation, a macro regime that forces the economy into recession simply because inflation is too high for central banks to ease financial conditions for fear of inflaming the problem.

Tariff Uncertainty has led to skyrocketing consumer inflation expectations and tanking confidence. Business confidence is also shaky due to uncertainty.

However,

Powell's tone was cool, calm, and confident when discussing the economic slowdown and tariff disruption. He basically communicated, " No Recession here," shrugging off tariffs as if they were inconsequential.

Dovish Pause

• He gave IF THAN scenarios about the economy that would trigger the Fed to step in. re-assurance
• He said tariff inflation is transitory. optimism
• He basically ended QT Action
  

Powell delivered a dovish Pause by providing reassurance, optimism, and action.

Ending QT

Starting in April, the FED will unofficially end QT by slowing the Balance sheet runoff from -25 billion/month to -5 billion/month. This is a significant easing of financial conditions as it results in more cash/reserves for the banking sector.

Although growth was revised down and inflation was revised up, the banking sector can expect a liquidity surplus of 20bn per month.

• This shows the fed is committed to supporting weakness.
• This also means that bonds catch a bid, which should lower treasury yields.

However, I don't think the market can fully recover until rate cuts are more certain or tariffs are resolved.

Major Changes in the FOMC statement (from December)

• Increased uncertainty around the economic outlook
• In April, the Fed will slow the pace of treasury run-off from 25bn/m to 5bn/m
• GDP was revised down to 1.7%, and Inflation was revised up to 2.8% for core prices
• Four participants expect no rate changes in 2025 versus 3 in December- Hawkish Dot plot.