Has Powell's "bluff" been seen through by the market?

Overnight US stocks surged, with all three major indices rising more than 1%, indicating that the market has put Powell's hawkish remarks behind it.

Now, no one in the market believes in Powell's "bluff", and the expectation of a rate adjustment by the "dove" has decreased.

Why is the market indifferent to two 25 basis point rate hikes and Powell's "hawkish" stance? Morgan Stanley's market intelligence strategist Andrew Tyler pointed out:

The market believes that pausing rate hikes at the current level of inflation (May CPI rose 4% YoY) may mean that the rate hike cycle has already ended. The end of the rate hike cycle also means the peak of yields and another high point for the stock market. Stopping rate hikes itself is a positive catalyst for the US stock market.

It is certain that ending the rate hike cycle while core CPI is still around 5% would be disastrous for the Fed's credibility, but Powell may have no choice. The Fed's inflation target seems to be shifting higher, from 2% to 3% or higher.

Nick Timiraos, a reporter for The Wall Street Journal, asked a question: If the Fed thinks it needs an additional 50 basis points of rate hikes, why doesn't it do it now? Powell's answer was that the Fed is almost at the end of the rate hike cycle.

Powell's answer reveals that, first, hawkish remarks may be to appease hawkish members of the FOMC, and second, rates are already high enough, and based on market inflation indicators, inflation expectations are further declining.

Regarding why the market has downplayed its initial hawkish reaction to the dot plot, Goldman Sachs analyst Michael Cahill also expressed a similar view: the decision to keep rates stable is more powerful than the dot plot, and the increase in the dot plot is largely because the Fed does not believe that inflation will decline, but the market has become more adapted to this. Overall, the market does not fully believe that the Fed will need to keep rates high for "a period of time".