Federal Reserve Federal Reserve Federal Reserve

Dissecting the Fed’s dovish surprise

Macro 3 minutes to read
APAC Research

Summary:  The markets have seen a relief rally with Fed Chair Powell ruling out a 75 basis point rate hike for now. While room for Fed’s hawkish surprises in getting restrained, stretched positioning going into the May meeting and rising expectations of larger moves led to the ‘as expected’ outcome to be perceived as ‘dovish’.

The Federal Reserve delivered its first 50 basis point rate hike in 22 years on May 4, and signaled similar rate increases are on the table for June and July. The balance sheet runoff is slated to begin in June with holdings of Treasuries and mortgage-backed securities (MBS) to start to decline at an initial combined monthly pace of USD 47.5 billion, stepping up over three months to USD 95 billion -  all of which was as expected. What was somewhat surprising was Fed Chair Powell ruling out larger (75 basis point) rate hikes for now – and that constituted as a dovish surprise fueling a relief rally in the markets.

Some key statements from Powell worth highlighting were:

  • the central bank is committed to get inflation under control and won't hesitate to go higher than neutral if need be
  • tightening is not going to be pleasant as rising rates mean borrowing costs and mortgages will be higher
  • Powell also praised former Chair Paul Volcker who had raised rates to 20% in late 70s/early 80s to crush inflation and caused a recession

All of these suggest anything, but dovishness. Fighting inflation remains the Fed’s top priority, and we saw some tentative indications that Powell sees a slightly more risk of a slowdown (or at least, a moderation in activity). That, however, will not come in the way of his fight against inflation.

This explains why he stayed away from the most hawkish stances possible. What made him dovish was the overshooting market expectations over the last few weeks as we approached the May meeting. In contrast, Powell’s tone was more calm, aimed at avoiding any shock waves to the markets on inflation. Also, Powell needs to save his ammunition, as underlying inflationary pressures are unlikely to come down significantly anytime soon and going too fast will mean going way above the neutral rate later and risking a hard landing.

In terms of today’s relief rally, it is worth noting that 5Y US Treasury yields and the US dollar are still at stretched levels, remaining above the levels that prevailed for most of April. So, positioning has a big role to play in today’s market reaction.

Over in emerging markets (EMs), the Reserve Bank of India (RBI) held an unscheduled meeting on May 4 – just hours ahead of the Fed announcement – and voted to increase the repo rate by 40bps, bringing it to 4.40%. Cash reserve ratio was also increased by 50bps, aimed to withdraw INR 870bn of liquidity. Meanwhile, Brazil’s central bank increased policy rates by 100 bps to 12.75% and signaled further tightening ahead. This is a 180 degree turn to its previous plans of ending the tightening cycle in May.

As food inflation, along with energy inflation, starts to bite EMs, we are likely to see more and more EM central banks getting on the tightening bandwagon sooner than expected. Indian 10-year yields rose 28bps to 7.40%, reaching their highest levels since 2019. Something of that nature can still be expected for other EM bonds as well.


Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.