Federal Reserve meeting minutes turn "hawkish"! Most officials support another rate hike this year, US dollar continues to rise

According to Zhitong Finance APP, on Wednesday, the latest Federal Reserve meeting minutes showed that all 19 officials supported a rate hike in September, and most participants believed that further rate increases might still be necessary before the end of the year. Although market bets on an immediate hike in October have clearly cooled off, the Federal Reserve’s continued hawkish stance continues to support the US dollar. Meanwhile, concerns over France’s fiscal situation have put renewed pressure on European bond markets, causing the euro to plunge sharply on Wednesday and gradually approach the 17-month low touched on Monday.

At the meeting held by the Federal Reserve from September 15 to 16, the target range for the federal funds rate was raised by 25 basis points to 3.75%-4%, marking the first rate hike since July 2023. However, officials had differing views on the reasons for the rate hike. Some participants believed that raising rates would help prevent energy and other price shocks from further boosting inflation; the more hawkish officials argued that, with US economic demand remaining robust, higher rates had become a necessary measure to guard against demand-driven inflationary pressures.

The minutes showed that most participants believed it might be appropriate to raise the federal funds rate target range again before the end of the year. Several officials also noted that the underlying growth momentum of the US economy appeared to have strengthened. Meanwhile, despite the sharp rise in long-term US Treasury yields recently, many officials believed that overall financial conditions still support economic growth; US equities have risen significantly this year, and corporate bond credit spreads have continued to remain at relatively low levels.

Federal Reserve Chair Powell said at the press conference after the September meeting that the rate hike was intended to withdraw some accommodative policies since inflation remains elevated. However, Vice Chair Jefferson and New York Fed President Williams both sent more cautious signals last week, indicating that the Federal Reserve has time to further observe economic data before deciding whether to continue raising rates.

This has significantly reduced market bets on consecutive rate hikes in October. According to the CME FedWatch Tool, the market currently expects about a 19.4% probability of the Federal Reserve raising rates by at least 25 basis points at this month’s meeting, down from around 38% a week ago; however, the probability of a rate hike in December still stands at 83%, showing that investors still expect a high chance of further tightening of monetary policy within the year.

After the release of the meeting minutes, the US dollar maintained its gains. The dollar index, which measures the dollar against a basket of major currencies, rose 0.32% to 102.24. The recent sustained high energy prices have also provided some support for the dollar. Juan Perez, Senior Trading Manager at Monex USA, said that in an environment where energy resources are hard to acquire, the dollar tends to attract capital inflows.

Meanwhile, fiscal risks in Europe have become another main theme in the foreign exchange market. Concerns about France’s fiscal situation continue to worry investors, driving up French and Italian government bond yields, especially in countries with heavier debt burdens, where there has been more pronounced bond selling, while traditional safe-haven assets such as German bonds have remained relatively stable.

On Wednesday, the yield on France’s 10-year government bond surged by 11.9 basis points to 4.8696%, on track for the biggest single-day increase in two weeks; over the same period, Germany’s 10-year bond yield was essentially flat at 3.4805%. This means the financing cost gap between France and Germany has further widened, reflecting investors’ demand for greater risk compensation to hold French bonds. French bonds have faced continued pressure recently. As the 2027 general election approaches, French politics still lack an effective consensus on reducing the budget deficit, while global central bank rate hike expectations and concerns over government finances have further pushed up bond yields. Spain’s announcement of early elections has also heightened market worries about political uncertainty in Europe.

Banque de France Governor Emmanuel Moulin said that as financing costs rise, France’s economic situation is indeed relatively challenging, but it has not reached the point where European Central Bank assistance is needed. French Finance Minister Roland Lescure stated that future French bond issuance will adopt a “strategic” approach.

Shriya Samarth, Head of Rates for Europe, Middle East, and Africa at StoneX, believes there is further downside potential for French government bonds, but this does not necessarily mean the market will panic. She pointed out that France is not currently sending signals of impending debt default, so the situation has not reached the severity seen in Greece during the European debt crisis.

The sharp rise in France’s fiscal risks, coupled with a stronger US dollar, has put significant pressure on the euro. On Wednesday, EUR/USD fell by 0.53% to $1.1198, gradually approaching the 17-month low set on Monday. GBP/USD fell 0.42% to $1.3216, but the pound reached its highest level against the euro since June 2025 at one point.

As for the yen, USD/JPY fell slightly by 0.09% to 157.95. Bank of Japan’s new policy board member Ayano Sato said she supports a phased increase in interest rates, which has provided some support for the yen.