Wall Street Wrap: Tolerant Fed drove risk-on mood

Market Recap

In a widely expected move, the US Federal Reserve (Fed) kept rates unchanged at 5.25% to 5.5% for the fifth straight meeting. Perhaps the dovish surprise was that despite an upward revision in 2024 core personal consumption expenditures (PCE) inflation forecast to 2.6% from previous 2.4%, Fed members remain adamant on having three rate cuts this year as reflected in the Fed dot plot. It reflects some tolerance from the Fed for some inflation persistence, which was very much cheered by market participants who can continue to look forward to impending rate cuts over the coming months.

In his comments, Fed Chair Jerome Powell downplayed the run of hotter inflation data, acknowledging that price pressures remain elevated but “haven't really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road to 2%”.

Fed members did project a higher rate outlook in 2025 (3.9% versus previous 3.6%) and 2026 (3.1% versus previous 2.9%), but impending rate cuts this year remain the point of focus. In terms of economic forecasts, Fed officials now project significantly higher growth (2.1% in 2024 versus previous 1.4%) and lower unemployment (4.0% in 2024 versus previous 4.1%), which should provide a vote of confidence for the resilience in the economy and further validate soft landing hopes.

Treasury yields reacted lower to the dovish takeaway from the meeting, with the two-year yields down 8.3 basis points (bp) to hover back at its 4.6% level. This comes as market rate expectations saw some swing in bets to price for earlier rate cuts, with the odds of a rate cut in June now seen at 68%, up from the 56% just before the meeting.

On the watchlist: Nasdaq 100 setting its sight for another all-time high

Megacap stocks led the market higher overnight, with all Magnificent Seven stocks ending the day in the green. For the Nasdaq 100, it has managed to find near-term support at the 17,800 level, as buyers successfully defended the key 50 level on its daily relative strength index (RSI) to keep the near-term upward bias intact. Its all-time high at the 18,400 level is now set in sight for a retest, with any successful break to fresh record territory serving as a continuation of its prevailing upward trend and may leave the 19,000 level on watch next.

On the watchlist: US dollar struggles on Fed’s dovish lean

Perhaps much disappointment to the dovish lean from the Fed may come from the US dollar bulls. The US dollar fell 0.42% overnight, failing to cross the upper edge of its daily Ichimoku Cloud. A key resistance to overcome may be at the 104.00 level to signal buyers taking greater control. Otherwise, further downside may leave the 102.12 level on watch, where dip-buying were spotted back in early-March with the formation of a bullish pin bar.