How does Wall Street view the Federal Reserve meeting? It is confusing, as the Fed lacks dovish momentum and the prospect of interest rate hikes within the year is not without concerns.

After the Federal Reserve's meeting on Wednesday, as expected by the market, it announced that it would keep interest rates unchanged. The post-meeting resolution was largely similar to the previous meeting in July. Commentators believe that the most market-moving factor is the Fed's noticeably more hawkish outlook for next year. In the June dot plot, the most frequently expected level of interest rates for next year was 4.375%, while the current dot plot shows a range of 4.875% to 5.375%.

After the announcement of the resolution, some Wall Street insiders found the signals released by the Federal Reserve confusing and unreasonable.

Mohammed El-Erian, Chief Economic Advisor at Allianz, expressed concern that the economic and policy signals sent by the Federal Reserve this time may confuse many people. Some may see it as an inevitable result of inflation and the policy cycle at this stage, while others may view it as further evidence of communication problems at the Fed.

Omair Sharif, President of Inflation Insights LLC, said it is difficult to explain why the Fed is projecting core PCE inflation to be 3.7% this year. The expectation of 3.7% inflation, along with the downward revision of the unemployment rate and the upward revision of GDP growth, can explain why the Fed no longer expects to raise interest rates twice, but the rationale behind this forecast is hard to prove. It implies that the monthly level of core PCE far exceeds the expectations of most people, especially considering that most people expect a 0.1% MoM increase in core PCE in August.

Sharif mentioned that the Fed's unemployment rate forecast for this year remains unchanged at 3.8%, which is also puzzling. He said Fed officials seem to have more confidence in the decline in labor market demand, as they expect that job vacancies and layoffs will not increase, reflecting a decrease in demand. What is strange is that the Fed is so optimistic about the labor market, but at the same time, it is pessimistic about core inflation this year.

"New Bond King" Jeffrey Gundlach said that due to the rise in oil prices, the possibility of the Fed raising interest rates again is higher. For the prospect of a Fed rate cut, oil prices are a headwind. This is one of the Fed's best interest rate decisions at this stage. He believes that it is the right decision to wait and see on rate hikes. Currently, the data is "extremely unreliable." The U.S. economy is facing many crosscurrents.

Lack of Momentum to Turn Dovish, Strikes and Other Factors May Disrupt Rate Hike Plans This Year, with Larger-than-Expected Rate Cuts

David Powell, Director of Market Strategy at TradeStation, said that the slightly hawkish Fed decision on Wednesday reflects the strong economic momentum that has emerged since the previous meeting in July. Fed policymakers currently lack the momentum to shift to a dovish stance, especially with the rise in oil prices and the possibility of strikes in the auto industry pushing up wages and car prices. The Fed's decision this time is based on a reassessment of the data, and if housing costs continue to decline, it could be good news. Academy Securities' macro strategy director, Peter Tchir, commented that the Federal Reserve does not want to cut interest rates and wants to maintain higher rates for a longer period. The Fed has raised its rate expectations by 50 basis points for the next two years, which aligns with our view that the threshold for rate cuts is quite high. The Fed always "relies on data," but it seems to have biases. Until early this summer, they seemed to be looking for excuses to raise rates.

The Bloomberg Economics team believes that although the dot plot shows that the Fed will raise rates within this year, we see that some shocks that may be detrimental to economic growth could disrupt the Fed's rate hike plans from now until the end of the year. Economic uncertainty, the strike by U.S. auto industry workers, and the disruption caused by the government shutdown could prompt the Fed to postpone rate hikes until next year or even cancel them altogether. Nevertheless, we still believe that another rate hike this year is becoming increasingly realistic.

Anna Wong, Chief Economist at Bloomberg Economics, said that given the Fed's optimistic outlook on unemployment and inflation in its economic projections, Bloomberg Economics' rule of two 25 basis point rate cuts next year and 120 basis point cuts the following year does align with the Fed's dot plot. The Bloomberg Economics team believes that there are risks of a weaker economic outlook than the Fed's projections, and the extent of the Fed's rate cuts will exceed the levels anticipated by the dot plot.

The Fed has more confidence in a soft landing, and even the hawks no longer expect two rate hikes this year

Jake Schurmeier, Project Manager at Harbour Capital Advisors, commented that the Fed seems quite optimistic about achieving a soft landing, as evidenced by their upward revision of the neutral interest rate expectations, despite the stickiness of long-term rate expectations in the dot plot.

Andrew Patterson, Senior Economist at Vanguard, said that considering the Fed's upward revision of GDP expectations and downward revision of the unemployment rate expectations, the Fed is increasingly confident in achieving a soft landing and the economy's ability to withstand the impact of higher rates for a longer period.

Derek Tang, Economist at LH Meyer/Monetary Policy Analytics, said that the dot plot roughly aligns with expectations, but the surprise is the upward revision of rate expectations to 5.1% for next year. He found that this year's rate expectations did not exceed 5.6%, which means that even the most hawkish Fed officials no longer expect the need for two rate hikes within this year, signaling a dovish tone in the short term. Among the total of 19 officials, seven expect no further rate hikes this year, which should put Fed Chairman Powell at ease.

The inverted yield curve in U.S. Treasury bonds will persist, signaling a stronger U.S. dollar

In terms of market reaction, Zachary Hill, Director of Portfolio Strategy at Horizon Investments, said that the Fed's forecasts align with a more resilient economic outlook in a high-rate environment, as higher rates imply a higher neutral rate. On the surface, this is not a good reason to abandon stocks, so he believes that this can explain why the market sell-off after the Fed's decision was not as strong. Citi's head of US stock trading strategy, Stuart Kaiser, said that Wednesday's market reaction generally aligns with the improved economic outlook. Higher interest rates pose a tactical risk to the stock market. However, Citi believes that the Fed's adjustment to the economic outlook is positive for the stock market. It is worth noting that the Fed's implication this time is a reduction in rate cuts rather than further rate hikes.

Ira Jersey, Chief US Interest Rate Strategist at Bloomberg Industry Research, said that if the Fed keeps short-term rates well above 5% for most of next year, the inverted US Treasury yield curve will continue to satisfy those who are paying close attention. However, we believe that even if the Fed does not cut rates, this curve will continue to reflect the expectation that the Fed will eventually lower rates.

Audrey Childe-Freeman, Chief G-10 Foreign Exchange Strategist at Bloomberg Industry Research, said that considering the strong signal of high long-term interest rates, there is not much in this week's Fed policy decision that could prevent the US dollar bulls in the short term. Therefore, this means that the attractiveness of the US dollar's yield is currently high. In addition, the upward revision of GDP growth expectations for the next two years also puts the US dollar bulls in a strong position. The sustainability of this situation clearly depends on whether the Fed will achieve a soft landing.