Doubting the Federal Reserve's ability to hike rates as forecast, markets are wrestling with the central bank over whether the economy reflects a glass half empty or half full.

The Fed hiked interest rates Wednesday by a quarter point and spelled out how it hopes to begin winding down its balance sheet this year. The Fed acknowledged low levels of inflation in the near term but expects inflation to stabilize in the medium term. The Fed also stuck to its forecast for three interest rate hikes this year, and it raised 2017 GDP to 2.2 percent from 2.1 percent.


Stocks waffled after the Fed's 2 p.m. announcement and were trading at lower levels, as Federal Reserve Chairwoman Janet Yellen held a briefing after the decision.

"What the markets are doing is basically ignoring the Fed, whatever they say. They are basically going off the data and they know eventually the Fed will get around to being sensitive of the data, that will be the driver," said Memani.

Treasury yields, which move opposite prices, had fallen sharply Wednesday after core consumer price index inflation came in weaker than forecast for a third month. The decline in year-over-year inflation to 1.7 percent spooked the market and raised more doubts over whether the Fed can hike rates as it forecasts. Retail sales data was also weak.


"The Fed pointed to a somewhat strengthening consumer," Keon said. "They're just not looking at the same numbers that I'm looking at, which seem to be coming in a tad weaker. Comparing Q1 to Q2 may look like it's getting a little stronger, but I'm not sure I see consumption accelerating."

What a farce -- the Fed's hikes aren't "real" (since, as we've discussed here umpteen times, no one uses the Fed funds market anymore) -- but the Fed feels it has to hike anyways to preserve "dry powder". But the inflation data (and most data beyond that, really) doesn't justify it. And the "dry powder" would only be perceptual anyways (we wonder if it would really have much effect, with the market catching on that changes in the Fed funds market have little attachment to reality).

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