Fed Quick Analysis: Powell pulls no punches, USD set to extend gains on open door to rate hikes

It ain't over until the most powerful man says so – the Federal Reserve (Fed) has left rates unchanged for a second time in a row but refuses to throw the towel in on further moves. Markets do not like it. 

The last rate hike was in July, completing a cumulated increase of 5.25%. While the Fed acknowledges the ongoing effect of past moves, it says it is unsure whether interest rates are restrictive enough. Investors prefer certainty, and that is only one of the reasons to worry.

What Fed Chair Jerome Powell is confident about is growth, which it describes as strong, and about the odds of a recession – it is not on the table. Another thing that the Fed rejects is cutting interest rates. Markets see accommodation coming in June 2024, but that is not on the radar for the central bank. 

What about tightening via higher yields? The Fed's statement includes a nod to the impact of elevated returns on long-term Treasuries to its policymaking. Higher mortgage rates choke households and reduce the need for further hikes. However, that acknowledgment remained minimal in Powell's comments – only one factor out of many.

The Fed will receive four more critical data points leading to its final decision of the year – two inflation reports and two Nonfarm Payrolls, the first on Friday. That gives Powell room to wait and see, leaving the door open to any decision. Powell mentioned that fact as another reason to expect further uncertainty.

In the short term, the Fed's hawkish tone has been priced into the US Dollar ahead of the event, so further Greenback gains seem limited. However, the world's reserve currency still has room to rise – until the data convinces markets and the Fed to change course.