Federal Reserve: Hawkish hold may offer US Dollar limited support – BNY

BNY’s Geoff Yu highlights that markets face a genuinely live Federal Reserve (Fed) decision, with futures implying about a 35% chance of a hike and a hold still the base case. He stresses that reaction will hinge on Kevin Warsh’s guidance on September, warning that a surprise hike would be cross-asset bearish and even a hawkish hold may offer limited relief.

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"Decision risk: Markets are waiting on a genuinely live Fed decision. A hold remains the base case, with futures implying roughly a 35% probability of a hike. That’s still an unusually wide distribution for decision day."

"The Fed is expected to hold rates today, but the decision is finely balanced, and the market reaction will depend less on the hold itself than on how much Warsh signals about September. Markets already price a strong chance of at least one hike by then, so a clearly hawkish hold may lift yields only modestly because expectations are partly embedded."

"The bigger risk is ambiguity: if the Fed gives little guidance, rates and FX volatility could rise as investors wait for the next CPI and PCE releases to determine whether energy-driven inflation is broadening. A surprise hike would be more disruptive, likely triggering a bearish cross-asset reaction as markets reassess the policy path."

"Bottom line: A hold remains most likely, but it may not resolve the uncertainty. Confirmation of a September hike would probably generate only a muted rise in yields, while limited guidance could prolong volatility. Anticipation is supporting patience, not confidence; disappointment from the Fed or earnings could quickly extend the de-risking."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)