• The Federal Reserve has raised rates for the first time since 2018, as expected. 
  • Projections for future hikes have met market expectations, weighing on the dollar. 
  • Chair Powell may open the door to 50 bps hikes, later on, boosting the greenback.

Hawkish now, more hawkish later? The Federal Reserve's dot-plot has shown only a total of seven rate hikes in 2022, just as bond markets see – a 25 bps move in every single meeting this year. One down,  six more to go. That is moderately bullish for the dollar, and the limited reaction makes sense.

However, the Fed has had to upgrade both its inflation and interest rate forecasts in the past year, ditching the transitory term and finding itself behind the curve. The war only adds to inflationary pressure in the US – even if it causes demand destruction in Europe, on whose soil the war is raging. 

Fed Chair Jerome Powell may want to leave his options open, including for a fast pace of rate hikes later down the line. While the man at the top is a known dove, he is representing the wider committee – and is also under pressure to depress inflation, the No. 1 topic for Americans. That implies a tough approach.

In recent testimony before Congress, Powell was asked if he would follow Paul Volcker, one of his admired predecessors, who pushed the US into recession to kill rising prices. His answer was positive. The question not only represents political pressure but also showed Powell's potential comments. 

With Core CPI at 6.4% – more than triple the Fed's target – there is no reason to deny the chance of seven or even ten hikes. It is always helpful flashing a big bazooka, potentially in order to refrain from using it.

For the dollar, the mere existence of such a bazooka could catapult the currency higher. 

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