The Fed threw in the towel this week and acknowledged what the market has known for some time. The four rate hikes previously envisioned for this year are now just two – the dots are falling. According to the Fed, the economy is just fine, just not fine enough to handle interest rates that don’t have a zero before the decimal point. Or maybe the Fed’s dot moves weren’t based on the US economy at all. The Fed mentioned “global economic and financial developments” twice in the statement after the FOMC meeting. One is left wondering what exactly what went on behind closed doors at that recent G-20 meeting.

Not only did the Fed repudiate its previous forward guidance but it managed to do it in a way that surprised the market. With some signs that inflation may well be making a comeback – and Vice Chair Fischer making exactly that observation not long ago – the consensus coming into the meeting was that the Fed probably wouldn’t do anything but would talk hawkishly to get the market to do its work. Well so much for that consensus. The statement along with the dot plot – the Fed’s guesses about rates, growth and inflation – was dovish beyond the wildest dreams of the most dovish dove. The statement cited soft “net exports and fixed business investment” as impediments to further hikes while also generally dismissing any rise in inflation saying that “survey based measures” are little changed; market indications notwithstanding I guess. They also cited “global economic and financial developments” as potential risks to growth. In general the statement emphasized the weakness of the economy while acknowledging that policy remains accomodative without saying aloud that the risks were tilted to the downside. All in all, a masterful bit of Newspeak.

The market’s reaction was immediate and extreme. No, I’m not talking about stocks. The big mover of the day was none other than the US dollar, down over 2.4% by the close of trading this afternoon. That might not sound like a lot but in the currency markets that is a gigantic move for such a short period of time. No matter how the Fed wanted its dog and pony show to be interpreted, the market took it as negative for the dollar and positive for all the things that do well when the dollar is not. Gold and TIPS surged along with the general commodity ETFs. The yield curve steepened and despite a continued rally in junk bonds, credit spreads widened, if ever so slightly. The steepening of the yield curve, if it continues, is particularly concerning as it indicates a fear of both recession – short rates falling – and inflation – long rates not falling as much.