Federal Reserve: Hawkish path extends into year-end – Commerzbank

Commerzbank’s FX Research team, including Charlie Lay and colleagues, highlight a hawkish shift from the Federal Reserve as it raised the Fed funds target range by 25bp to 3.75–4.00%. The updated dot plot points to another hike this year and higher rates through 2028. Fed funds futures now price a meaningful probability of an October move, reinforcing Dollar support.

Hike, dots and futures reprice

"The main theme overnight was a hawkish Fed rate hike. The Fed unanimously raised the Fed funds target range by 25bp to 3.75-4.00%, its first increase since 2023. It signaled that further tightening is likely as it seeks to contain persistent inflation."

"The updated dot plot reinforced the message. The median Fed funds projection for end-2026 rose to 4.125% from 3.75% in June, consistent with another 25bp hike this year. Sixteen of the 18 officials submitting 2026 rate projections expect at least one further increase this year."

"The median Fed funds projection for end-2027 is at 4.125% compared to 3.625% in June, and at 3.875% for end-2028 compared to 3.375%."

"The Fed funds futures are pricing in 51% probability of a 25bp hike in October and a total hike of 33bp by year-end. The Fed has two meetings left this year, on 27-28 October and 8-9 December. The October meeting will take place just a week before the mid-term elections."

"The main factor behind the rate hike was likely the tight conditions in the bond market, which would likely have made maintaining the status quo too risky. We are adjusting our Fed forecast and expect another rate hike in December."

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