The market calls the Fed's bluff

The Fed dots and commentary from Powell were more-hawkish than anticipated. Initially, the market reaction is what you would expect with the dollar rallying and stocks falling but the market later reversed and is roughly back to pre-Fed levels.

A big reason why is that the bond market simply doesn't believe the Fed's forecasts. It's a reminder that at this time last year the Fed was only forecasting 75 bps in total hikes in 2022.

This time, the Fed is forecasting year-end rates in 2023 at 5.00-5.25% while the market is almost 100 bps lower.

The terminal rate is also at 4.87%, which is well below what the Fed is saying. That number briefly moved up above 4.90% on the Fed decision but is back to roughly unchanged on the day.

For his part, Powell did leave the door open to fewer hikes, highlighting data dependence but he also said "it will take substantially more evidence to give confidence that inflation is on a sustained downward path."

He went on to talk about Fed expectations for persistent strength in non-housing services inflation as potentially problematic going forward.

Ultimately, it's very hard to fight the Fed. The market will need data point after data point to undershoot to prove out the strategy so at best it will be a bumpy road.