The Federal Reserve has delivered another hawkish surprise. In the opinion of economists at MUFG Bank, the hawkish policy update from the Fed is set to propel the US dollar.
Fed participants are moving in a more hawkish direction
“The US dollar and US short rates have been lifted by building expectations that the Fed will begin to raise rates as soon as next year. Those expectations have been supported by the signal from the Fed that a ‘moderation in the pace of asset purchases may soon be warranted’. The reference to ‘soon’ implies that a taper announcement is likely at the November FOMC meeting provided that there is no negative shock in the interim period.”
“The dots show that two more members now expect the first rate hike next year leaving the committee split 50/50, and it raised the median forecast to 0.25%, up from 0.125% in June. The median forecast for 2023 year is now 1.00%, up from 0.625% in June which adds a further one-and-a-half 25bp hikes.”
“The hawkish policy signals should encourage a stronger US dollar especially against low yielding currencies like the euro.”
