THE message from the US Federal Reserve to markets was clear: Goldilocks is back in town.

The Fed held rates steady in a range between 5.25 and 5.5 per cent and warned that inflation is still too high for comfort. Fed chairman Jerome Powell did not make any promises about his next move, and said it was unlikely that the days of ultra-low monetary policy would return any time in the foreseeable future.

None of that mattered. There were three dots on the plot and that was enough for the stock market to celebrate.

The big fear for stock owners was that recently heated inflation data would cause Powell to revert to his hawkish self, and force the central bank to back off their projections for three quarter-point rate cuts this year. But the Fed’s forecasts for growth, inflation and policy might have been written by the most ardent bull piling into artificial intelligence stocks and Bitcoin.

Not only were the projections for the three cuts still there, the Fed only modestly increased its inflation target while significantly upping its forecast for gross domestic product growth in 2024.

“Looking at the summary economic projections right now, it’s pretty Goldilockish,” said JD Joyce, president of Houston financial advisory Joyce Wealth Management.

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In a Goldilocks scenario, the economy is hot enough to support corporate-earnings growth, but not so hot that the Fed is forced to fight inflation. The eras when the economy is in this Goldilocks phase, such as the 1960s and the 1990s, typically coincide with the strongest stock-market returns.

Another twist to the Fed statement was the projection that consumer price inflation will linger between 2 and 3 per cent for the next two years. Powell had previously been very strict about the Fed not quitting its tightening policy until its long-time target of 2 per cent inflation was achieved.

“So that’s telling you they’re willing to put up with modestly higher inflation,” noted Joyce. “It sounds like... (they’re) willing to take time to get to 2 per cent. Ultimately, in 2026, they see 2 per cent, but they’re not as, perhaps, dogmatic on such a short timeframe.”

There was a cherry on top of the Goldilocks porridge in the form of an unexpected plan to reduce selling bonds – a sign that the Fed was almost finished with unwinding its quantitative easing (QE). The reversal of QE was another factor in the surge in Treasury yields and mortgage rates in the last two years.

“Chairman Powell mentioned that they were thinking about slowing the pace of their balance sheet run-off; and despite his point that the net balance-sheet reduction would be the same over time, in practice it will result in even less liquidity being drained from markets this year than previously expected,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in a statement.

Powell was cagey about the timing of this move, too. But the fact that he explicitly mentioned it seemed to be a hint that the Fed could start loosening monetary policy in June, as the bulls had fondly wished, but start in a small way with the bond plan and save the rate cuts for later in the summer.

Confirming the sense that global markets had entered a new era, the Swiss Central Bank became the first among major currency issuers to cut rates on Thursday.

The stock market took flight, with the cyclical small caps in the Russell 2000 rising by more than 1.5 per cent after being on the flat line for the day going into the meeting.

Another breath of fresh air was Powell’s suggestion in the press conference that strong hiring alone would not discourage the Fed from following the rate-cutting plan. The more Powell talked, the higher the stock market climbed.

The whole thing – the policy statement and the press conference – was music to the bulls’ ears. “How could you ask for much more?” said Joyce.