Fed’s shift should keep dollar in the ascendancy

After arguably the most hawkish Fed meeting in well over a year, dollar longs will be emboldened by the central bank’s shift towards a new phase that implies rates will need to be higher for longer.

The 2025 median dot now shows 50bps of easing, down from 100bps in the September projections. And with inflation appearing to bottom out above target, as well as the threat of tariff-induced price rises from the incoming Trump administration, it is plausible that the Fed is on a prolonged pause throughout the whole of next year – currently an 18% chance according to CME FedWatch.

While a hawkish Fed cut was largely expected given the rhetoric from officials in the lead up to the decision, this meeting showed the first real signs that officials are growing concerned over a rebound in inflation.

Four of the 2024 dots were above the current rate at 4.625%. Fed’s Hammack dissented by voting to leave rates unchanged, while Chair Powell emphasized that the decision to cut was a close one. At the very least, this sets a high bar to a cut in Q1 2025. This will also heighten the event risk attached to incoming inflation reports.

For now, the dollar should remain in the ascendancy leading into Trump’s inauguration on Jan. 20, where the focus will be on whether his administration delivers tariffs on Day 1. Such an outcome can propel the dollar even higher, although, should Trump take a more gradual approach to tariffs, this would likely weigh on the greenback.

(Justin McQueen is a Reuters market analyst. The views expressed are his own.)