Fed dot plot backs hawks as Warsh tone rattles markets more than the hike
At a Glance
The desk highlights that the recent Federal Reserve hike of 25 basis points, which raised rates to a target range of 3.75% to 4.00%, serves as a firm commitment to the hawkish outlook reinforced by Chair Warsh's remarks. Per the full note , the focus shifted to the recovery in the 10-year Treasury yields surpassing 5%, signaling market concerns about sustained inflation and higher borrowing costs. This suggests that traders should remain vigilant for potential pricing in an additional rate hike in December, contrary to perspectives articulated by other firms like Goldman Sachs. A review of forecasts from key banks indicates a consensus on higher rates despite some divergence on timing, solidifying this outlook ahead of any significant economic data releases.
Key Takeaways
- 01Fed's hike signals commitment to hawkish policies
- 025% threshold for 10-year Treasuries indicates market concerns
- 03JPMorgan and Deutsche Bank align with further hikes
- 04Goldman's perspective diverges on rate hike timing
Full Analysis
What the desk is arguing
The desk asserts that the Fed's recent rate hike is indicative of a persistent hawkish stance, particularly illustrated by Chair Warsh's clear communication about inflation concerns. As stated in the source, the market's pivot to the 10-year Treasury yield above 5% represents a critical juncture that could influence trader sentiment around rate-sensitive equities and the USD.
Additionally, the Fed's dot plot aligns with an expectation for further tightening, with three major firms, JPMorgan, Morgan Stanley, and Deutsche Bank, forecasting an additional hike by the end of the year, contrasting Goldman’s more cautious outlook. This divergence emphasizes the Fed's commitment to addressing inflation stubbornness.
Where it sits in our coverage
Our consensus target suggests a 1.075 level for the USD, with a range generally varying between 1.04 and 1.12. Notable targets for December 2026 include: - jpmorgan: 1.10 - goldman: 1.04 - deutschebank: 1.12
This view strongly aligns with jpmorgan and deutschebank, whose positions reinforce this upward trajectory in expectations, positioning at the higher end of the spread outlined.
How other firms see it
Firms like jpmorgan, deutschebank, and morganstanley appear synchronized in their outlook for further rate increases, highlighting a consensus around a hawkish Fed. Conversely, goldman slants toward a more tempered outlook with its one-and-done narrative, suggesting a slower pace of tightening than its peers.
Close attention should be paid to indicators such as US inflation metrics, which could reinforce this narrative, directly influencing dollar pairs like USD/JPY and GBP/USD.
Market Implications
Market participants should be watchful of the 10-year Treasury yield levels as they test and stay above the critical 5% mark. Additionally, the upcoming December rate hike discussion may significantly influence USD positioning during that period.
From the original
With the 25bp hike itself fully priced, the market's reaction Wednesday centred on the 10 year Treasury yield's push back above 5%, a level Art Hogan of B. Riley Wealth flagged as the more important signal than the rate decision. A hawkish dot plot alongside Warsh's tougher press
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