Markets price in 38 bps of Fed tightening by year-end after the central bank adopts a hawkish bias amid persistent inflation.
The US dollar rallied sharply after the Federal Reserve’s latest dot plot signaled a potential rate hike this year, defying expectations for no change. The median projection now shows one hike, with some policymakers forecasting multiple increases. Markets reacted swiftly, pricing in 38 bps of tightening by December, with a 40% chance of a July hike and 72% odds for September.
Prior to the release, consensus anticipated no cuts or hikes in 2024. The Fed’s shift underscores its focus on bringing inflation back to the 2% target, which has remained elusive since 2021. Policymakers emphasized data dependency, with financial markets now seen as a key input for future decisions.
USD/JPY surged to levels last seen in 1986, reflecting the widening policy divergence between the Fed and other major central banks. The yen’s weakness persists as the Bank of Japan maintains ultra-loose monetary settings.