The Central Bank Playbook: Trading the Fed

1. The Dual Mandate

The Fed has two jobs, and they often conflict:

Stop Inflation (Price Stability): Requires raising rates.
Keep People Employed (Max Employment): Requires lowering rates.

The Trade: When inflation is high (above 2%), the Fed ignores employment and hikes rates (Buy USD, Sell Stocks). When unemployment spikes, they pivot to cutting rates (Sell USD, Buy Stocks).

2. Hawkish vs. Dovish

You must speak the language.

Hawkish (Hawk): Wants higher rates to fight inflation. Aggressive. "We will do whatever it takes." -> Result: USD UP, Stocks DOWN.
Dovish (Dove): Wants lower rates to stimulate jobs. Passive. "We are monitoring the data." -> Result: USD DOWN, Stocks UP.

3. The 2-Year Treasury Yield

This is the cheat code. The US Dollar (DXY) has a 95% correlation with the US 2-Year Treasury Yield.

Rule: If the 2-Year Yield is breaking out to new highs, DO NOT short the Dollar, even if the RSI says "Overbought." The yield drives the flow of capital.
Mechanism: Global capital flows to where it gets the highest "Risk-Free Return." If US bonds pay 5% and German bonds pay 2%, capital sells Euros and buys Dollars to buy US bonds.

4. The Dot Plot (FOMC)

Four times a year, the Fed releases a chart showing where each member thinks rates will be in the future.

Trade the Delta: If the market expected 3 cuts, but the Dot Plot shows only 1 cut, the market must violently re-price. This "repricing" is where the biggest moves happen.

Conclusion: Don't Fight the Fed

Martin Zweig coined the phrase "Don't Fight the Fed" in 1970. It remains true. If the Fed is draining liquidity (QT), buy the dips in the Dollar and sell the rips in Equities.