The DXY Index rose 0.7% overnight to 100.32 after the Fed voted unanimously (12-0) to raise the Fed Funds Rate by 25 bps to 3.75-4.00%, its first hike in three years. The Summary of Economic Projections showed officials pencilling in one more hike in 2026. Fed Chairman Kevin Warsh again declined to provide his own projections, standing by his opposition to forward guidance. Markets now see a greater chance that the next hike will come on December 9 rather than October 28, pushing the decision beyond the November 3 US midterm elections.
We are not convinced that the Fed’s hike decision marks the start of a sustained USD uptrend.
First, US equities reacted negatively to the decision, with the S&P 500 Index falling another 0.45%. Warsh ended hopes of a return to rate cuts soon by stating that financial conditions were still not restrictive enough. Investors worry that keeping borrowing costs elevated to contain sticky inflation could eventually weigh on the US economy.
Second, the decision reinforced the Fed’s independence credentials, which puts it on a collision course with the White House. US President Donald Trump demanded that the Fed cut interest rates to 1% or less after the decision.
Third, the Treasury market remains an important drag on confidence. The US Treasury 10Y and 30Y yields remained firm at 5% and 5.36%, suggesting that the struggle over long-term borrowing cost is unresolved. Warsh explicitly used the phrase “We will stay in our lane” to draw a boundary around the Fed’s monetary policy to address inflation, leaving the Treasury to deal with higher government borrowing costs on its own.
Finally, the Fed is simply catching up with the European Central Bank and other major central banks in responding to inflation risks and preventing energy price shocks from generating second- and third-order effects across the US economy.
The Bank of England is expected to deliver a hawkish hold today, but the market is pricing the same hiking profile as the Fed into 2027. The Bank of Japan is also expected to deliver a hawkish hike tomorrow and keep the door open to further tightening.
Overall, we expect the DXY to remain within the broad 96-102 range established since mid-2025. This is not the US-led hiking cycle in 2022.
Quote of the Day
“What was most significant about the lunar voyage was not that men set foot on the moon but that they set eye on the earth.”
Norman Cousins
Today in history
NASA publicly unveiled the Space Shuttle Enterprise on September 17, 1976, during a rollout ceremony in Palmdale, California.
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