Dollar Stands Firm After Hawkish Fed Decision
The US dollar has maintained most of its gains from last night's Federal Reserve decision to increase the fed funds rate by 25 basis points. The move was accompanied by a hawkish message from Fed Chair Warsh, who stated that the hike had 'removed a dose of accommodation.' This suggests that more action will be necessary to combat inflation.
Warsh downplayed the forecasts for the year-over-year core CPI rate, which is expected to reach 2% in 2029. However, he emphasized that these projections were based on input from all 19 FOMC members, implying a willingness to take more drastic action if needed.
The median dot levels for future hikes are also noteworthy, with the 4.125% level for 2026 and 2027 indicating another hike is likely followed by no cuts until 2028. The long-run fed funds rate was increased by 12.5 basis points to 3.25%, and GDP and unemployment rate projections painted a rosy picture of the economy's outlook.
Despite Warsh's hawkish tone, market expectations were already high for a significant rate hike or dollar advance. The OIS curve ahead of the meeting priced in more than two hikes, which may help contain rates and FX reactions for now.