Fed Turns More Hawkish Than Expected: Dollar and Bond Yields Jump as Rate-Hike Bets Rise

A hawkish Fed resets market expectations

Global markets were surprised on Wednesday less by the rate increase itself than by the Federal Reserve's message that the tightening cycle may not be over. The U.S. central bank voted unanimously to raise its benchmark interest rate for the first time since summer 2023, moving the target range to 3.75%-4.00% as policymakers continue their fight against persistent inflation.

The hike was broadly expected. Andrew Melville of Block Scholes noted that markets had already priced in a probability above 90%. However, the forward guidance proved more impactful: Tom Cahill of Ventura Wealth Management said most Fed officials believe at least one more rate increase will be needed this year to counter price pressures linked to the Middle East conflict. Fed Chair Kevin Warsh reinforced that view, saying inflation remains too high for too long, while CME FedWatch shows investors now expect another tightening move as early as October.

Wall Street falls as easy-money hopes fade

Higher interest rates are designed to cool economic activity by making borrowing and investment more expensive. That can reduce demand for goods and services, but it also weighs on corporate profit expectations and equity valuations, especially in rate-sensitive sectors.

• Dow Jones: down 1.21%
• S&P 500: down 0.45%
• Nasdaq Composite: nearly flat, down 0.01%

European stock markets had already closed before the Fed announcement and finished the session in positive territory. Paris gained 0.68%, helped by renewed interest in artificial intelligence infrastructure names, including STMicroelectronics, which rose 1.96%. Frankfurt advanced 0.53%, with Siemens Energy leading the session after a 3.61% gain. London rose 0.28% and Milan climbed 0.80%.

U.S. yields and the dollar strengthen

On the U.S. bond market, yields moved sharply higher as traders adjusted to the prospect of borrowing costs staying elevated for longer. The 10-year Treasury yield reached 5.02% around 21:00 GMT, compared with 4.95% before Kevin Warsh's press conference.

The dollar also posted broad gains, supported by the appeal of higher U.S. rates. The euro fell to 1.1466 dollars, while the British pound slipped to 1.3381 dollars. Against the euro, the greenback rose 0.68%, and against sterling it gained 0.74%.

Oil takes a breather after recent surge

Crude oil, one of the main drivers of headline inflation, pulled back after several days of sharp gains. Brent crude fell 2.69% to 105.83 dollars a barrel, while West Texas Intermediate declined 3.21% to 102.43 dollars.

Robert Yawger, analyst at Mizuho USA, said recent developments in Saudi Arabia suggested the situation was less severe than initially feared. Market participants reportedly received information that Saudi authorities could restore part of the East-West pipeline within days rather than weeks or months.

Riyadh had announced a temporary shutdown of the strategic pipeline, which connects eastern Saudi Arabia to the Red Sea, after attacks attributed to drones coming from Iraq. The route has become increasingly important as an alternative to the Strait of Hormuz, where shipping has been heavily disrupted since the start of the conflict. According to an AFP analysis of maritime tracking data, the creation of a U.S.-secured navigation corridor in Hormuz has coincided with a significant increase in Gulf oil exports.