June FOMC Review

FOMC statement: little changed, with Fed maintaining that inflation remains transitory.

Dot plot: big change to board's rate expectations, with participants now factoring in two rate hikes by end-2023.
Summary of Economic Projections: There were no substantial changes to the 2022 and 2023 forecasts, except a sharp upward revision to 2021 GDP and inflation projections.
Press conference: given fairly dovish expectations, Powell sounded slightly hawkish, warning that “inflation could turn out to be higher and more persistent than we expect”.
Market reaction: The markets interpreted the Fed as hawkish, sending asset prices lower across the board. The US five-year to thirty-year yield curve flattened and US Treasury yields rose across the board. US equities sold off, while the dollar index gained 0.7%.

Investment implications: Tweaks to the statement and economic projections are a reflection of growth coming in higher than expected and inflation above target.If the US labor market rebounds more strongly and inflation remains elevated, they may pull forward their tapering cycle.We recommend a cautious exposure to US Treasuries, while favoring inflation-linked bonds with some selective positions in those sectors which are best positioned to capitalize on reopening of the economy.

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