The U.S. dollar, quite unexpectedly and contrary to the main market’s storyline, violently rebounded overnight. The reason is obvious: the Fed has disappointed the market with the expectation of higher and longer rate hikes. The DXY Dollar Index now stands at close to 104.40, despite the broad hopes it could calm down to at least 102’ish levels, necessary for riskier assets to revive and prevent growing risks of common households’ insolvencies. Without it, global markets and world economy will keep struggling for months to come. The FOMC median dot plot for Federal Funds Rate (FFR) at the end of 2023 is now 5.1%, well above both the previous (September) forecast of 4.6% and the market expectations based on the futures on the Fed Funds Rate. The Open Market Committee (FOMC) of the U.S. Federal Reserve unanimously raised FFR by 0.50% to 4.25-4.5%, as expected. The last four rate hikes have been in increments of 0.75%.

So, now, once again, The FOMC median dot plot for FFR at the end of 2023 is now 5.1%, well above both the previous (September) forecast of 4.6% and derivatives market expectations. Against this background, the dollar rose against the G10 currencies, and the US stock market fell by about 1.5%.

The distribution of FOMC member forecasts by end-2023 FFR was broadly higher than before, with seven forecasts above 5.1%, ten at 5.1%, and two at 4.9%. The FOMC's accompanying statement retained the word “ongoing” in reference to the rate hikes needed to reach a sufficiently restrictive level to bring inflation back to 2% over time.

The U.S. unemployment rate is expected to rise to 4.6% by the end of 2023, where it will remain throughout 2024. The forecast for US GDP growth in 2023 is 0.5% against the September estimate of 1.2%.

It’s easy to calculate, that if Fed sticks to it’s inflation-fighting posture and rise interest rates, even by 0.5 p.p. Increments throughout 2023 (The U.S. Fed will meet to set interest rates 8X in 2023), then at the end of that year the FFR will land at a fantastic level of 8.5% rather than the median 5.1% reflected in the median dot-plot. No question, if that will prove to be the case, global economy will be in deep and continuous recession at that time.