Kevin Warsh's hawkish debut as Federal Reserve Chair revived one of the market's most reliable plays — going long the dollar when the central bank looks ready to hike interest rates.
The U.S. Dollar Index – as tracked by the Invesco DB U.S. Dollar Index Bullish Fund (UUP) – rose 0.8% to above 100.15 on Thursday, its highest level since May 2025 and the cap on a roughly 13-month climb.
The move followed a Federal Open Market Committee meeting that broke sharply with March. Nine of the 19 participants penciled in a rate hike this year, and the median projection now puts the federal funds rate at 3.8% by the end of 2026, up from 3.4% three months earlier.
Inflation forecasts were lifted hard. The committee sees personal consumption expenditures inflation running at 3.6% this year, with core PCE — the gauge it watches most closely — revised up to 3.3%.
Warsh framed the fight in stark terms in his first remarks.
“Persistently high prices are a burden for the American people. But the recent past need not be prologue,” he said.
“This committee will deliver price stability,” he said.
Markets Race To Price A Hike
Traders moved fast. Futures tracked by the CME FedWatch tool now price a 36% chance of a hike at the July 29 meeting.
By the Oct. 28 meeting, the probability that the funds rate has moved at least once reaches effectively 100%, and the market assigns a 56% chance of a second increase to a 4.00%–4.25% range by the Dec. 9 meeting.
Wall Street Splits On What Comes Next
Bank of America read the meeting as unambiguous.
The bank's economist Aditya Bhave wrote that the gathering was clearly hawkish, citing the nine hike projections, the marked-up inflation path and Warsh's own lean, and noted the chair's views are hard to pin down because he declined outlook questions and rejected forward guidance.
After the meeting, “we see a much higher risk that the Fed will hike this year,” Bhave wrote.
Goldman Sachs pushed back. Economist David Mericle wrote that the meeting raised the odds of hikes later in the year but that the firm still expects no change in 2026, arguing most voters likely lean toward holding and treated the reported Iran deal and the reopening of the Strait of Hormuz cautiously.
“Our base case is still that the FOMC will leave the policy rate unchanged,” Mericle wrote, adding the projections could look stale fast if shipping through the strait resumes and the biggest upside risk to inflation fades.
22V Research's Peter Williams focused on the liquidity risk and communication shifts.
He wrote that Warsh's new task forces could produce two rate-relevant shifts: a restart of quantitative tightening, or a swap of Treasury notes for bills, as soon as the first quarter of 2026, and a stripped-down Summary of Economic Projections.
“We could receive much less communication,” Williams wrote, flagging that the dot plot itself may be gutted or dropped.
How Did The Dollar Perform After Fed Hikes
Over the past 10 years, there have been 15 Fed rate hikes, and the dollar's response afterward has been positive more often than not — and increasingly so the longer the horizon.
The typical hike was followed by a 0.83% dollar gain after one month, 1.15% after six months and 2.89% after a year.
The win rate builds with time. The dollar was higher one month later in 60% of cases, dipping through the three-month mark before climbing to two-thirds — 66.67% — at both six months and one year.
The averages look soft because a few episodes went badly.
That gap between a negative average and a positive median is the fingerprint of a few large outliers. The 2016 and 2017 hikes, delivered when the cycle was already well-priced, saw the dollar fall by as much as 12.41% over the following year.
The aggressive 2022 tightening did the reverse, with the March 2022 hike followed by a 12.19% surge over six months — the strongest reading in the sample.
Whether it holds this time turns on a variable the 2016-2023 sample never faced: a Fed chair who has stripped out forward guidance and dared traders to price the data themselves.
