Fed review: First hike from Fed and two more to come

The Fed raised rates by 25bp to 3.75-4.00%. All members voted in favour. This was more hawkish than we expected, as we saw a risk that 2-3 members would favour unchanged rates.
Warsh repeatedly highlighted the economy’s and labour market’s resilience, allowing the Fed to focus on bringing inflation back to target.
We think the macro case for further tightening remains strong and maintain our call for 25bp hikes in both December and March.
The UST curve flattened, while EUR/USD fell to 1.1470 from around 1.1540, which we think is justified.

Danske Research Team Danske Bank A/S

We received the economic projections and ‘dots’, despite uncertainty given Warsh’s preference for less forward guidance. As in June, Warsh did not submit projections himself or comment on whether they would continue from here.

The dots show consensus for one more hike in 2026, in line with our expectation. For 2027, the median signals no further hikes, but 8/18 participants call for one more hike to 4.25-4.50%, in line with our call.

Growth projections were revised slightly higher to 2.3% in 2026 and 2.4% in 2027, from 2.2% and 2.3%, respectively. Inflation projections were broadly unchanged. Unemployment projections were lowered to 4.1% for both this year and next, from 4.3%. In the risk assessment, no participants now saw risks tilted towards weaker GDP growth or a weaker labour market anymore. This allows the Fed to focus fully on inflation risks, which nearly all participants see as skewed to the upside. The short statement was essentially unchanged, with only a minor addition being “domestic spending has been resilient”.

In his speech, Warsh repeatedly highlighted the resilience of the economy and labour market. He also repeated his Jackson Hole remarks that financial conditions do not seem restrictive.

This was in line with our point in this week’s RtM USD - The Fed to hike this week and beyond, 15 September. We have long argued that nominal growth would eventually push the Fed towards a tightening bias, which it now also sees unfolding. We think the macro case for further tightening remains solid.

The 2Y UST yield rose around 13bp after the rate decision and the press conference, with markets now pricing three additional hikes over the coming year. Our call remains 2x25bp in December and March. The UST curve flattened as the 10Y yield rose less. EUR/USD fell to 1.1470 from around 1.1540, while the DXY index rose about 0.6% on the day. In broader G10 FX, SEK and NOK underperformed as tighter financial conditions weigh on the growth outlook. We think the market reaction makes sense, even if Fed pricing is starting to look hawkish versus our baseline. We expect EUR/USD to decline further over the coming year and target 1.12 in 12M.

Author

Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

AUD/USD edges higher as hot CPI inflation and hawkish RBA lift rate hike bets

The AUD/USD pair gathers strength to near 0.7035 during the Asian trading hours on Friday. The Australian Dollar edges higher against the US Dollar as hotter Australian CPI inflation data has bolstered expectations of Reserve Bank of Australia rate hikes.

USD/JPY meets support near 157.00

USD/JPY retreats for the third consecutive day on Friday, revisiting the 157.00 region before attempting some recovery as investors continue to assess the latest BoJ meeting, where the central bank left rates unchanged, as widely anticipated.

Gold sinks to fresh yearly lows despite risk-off mood as Fed rate hike bets weigh

Gold slips to fresh year-to-date lows on Friday. The metal struggles despite a risk-off mood across markets, as expectations of further Federal Reserve (Fed) interest rate hikes continue to dominate price action, leaving Gold on track to end the month in negative territory.

Ripple Price Forecast: XRP bulls defend $1.20 as sell-side pressure triggers liquidations

Ripple (XRP) trades around $1.25 on Friday, rising from a short-term support level established at $1.20. This minor upward correction follows a sharp sell-off, triggered amid reports of a hack attack on the Binance exchange that impacted approximately $6.3 billion. The attack drove the broader crypto market on edge, as Binance suspended both deposits and withdrawals to contain the situation.

BoJ recap: A pause for now... but Japan has entered a new inflation phase

The Bank of Japan left its short-term policy rate unchanged at 1.25% but delivered a distinctly hawkish message on the risk of an inflation overshoot. The decision passed by 8-1, with board member Takata dissenting in favour of an increase to 1.5%, while Governor Kazuo Ueda stressed that the Bank would continue adjusting policy as needed.

The 2% inflation target came from a throwaway remark. It now moves trillions

The Federal Reserve's 2% inflation goal grew out of an off-the-cuff remark by a New Zealand politician in 1988. Bond investors still price long-term US debt as if 2% holds, so a change in how the Fed measures inflation would move markets.