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The Fed raised rates on Wednesday for the first time since July 2023, a unanimous 12 to 0 vote lifting the target range to 3.75 to 4.00 percent. The Bank of England held on Thursday. The Bank of Japan hiked on Friday to 1.25 percent, its highest in 31 years. Three major central banks moved within 48 hours, and all of them are tightening into an inflation problem caused by oil supply, which no interest rate can fix. That contradiction is the most useful thing to understand right now. Meanwhile the Bank of Japan delivered exactly the rate hike the yen needed, and the yen fell anyway. There is a good reason for that, and it matters more than the headline.
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Start with the honest contradiction. A rate hike works by cooling demand: borrowing costs rise, spending slows, price pressure eases. But this inflation is coming from the supply side, with diesel at a record $6.29 a gallon, up 68 percent from a year ago. Raising rates does nothing to move more crude through the Strait of Hormuz. So what are these central banks actually doing? They are defending inflation expectations, which is the point we made last week about that 4.6 percent consumer reading. The aim is to stop a temporary energy shock from becoming permanently embedded in how people set wages and prices. Warsh said it plainly: the plain fact is that inflation is too high, and has been for too long. The statement added that the committee will deliver price stability.
The dot plot deserves careful reading, because it says something more specific than the headlines suggested. Sixteen of eighteen participants expect at least one more hike this year, and twelve see the year ending around 4.125 percent, with four expecting two more moves. Warsh continues to submit no dot at all. Look further out, though, and only eight dots show another increase in 2027, with a cut pencilled in for 2028. This is not the start of a long tightening cycle. It reads as one more move and then a pause, which is a meaningfully different message from what a hawkish headline implies. Warsh also spent time downplaying the funds rate in favour of a smaller balance sheet, hinting the next phase of tightening may arrive through shrinking holdings rather than higher rates.
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US30 (Dow Jones) |
round trip | VIX 15.44 |
The week was a round trip. Stocks fell on the decision itself, with the Dow down 1.2 percent and the S&P off 0.5 percent on Wednesday, then recovered all of it on Thursday as the S&P rose 1.14 percent to 7,637.76 and the Nasdaq added 1.69 percent. Friday eased back amid triple witching. Recovering a selloff in a single session usually means the selling was position-squaring before a known event rather than a change of view, and the VIX supports that, falling nearly 13 percent to 15.44. Less comfortable: US equity funds saw outflows for a fourth consecutive week, and global equity funds recorded their largest weekly outflow in nine months.
Price action suggests: Event premium unwinding rather than a directional shift, though persistent fund outflows sit awkwardly alongside a calm volatility reading.
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Gold (XAUUSD) |
Weekly close $4,424.90 | +0.6% Friday |
December gold settled at $4,424.90 on Friday, up $25.20 or 0.57 percent, closing the week with gains after touching near six-week lows earlier. The pattern around the decision is instructive: gold fell about 1.2 percent on the hike itself, then rose 1.74 percent the following day. That is the difference between reacting to an event and reacting to what the event revealed. The hike was already priced, so the initial drop faded quickly, and buyers returned once the dot plot showed only one more move likely before a pause. A softer oil price and a steadier dollar late in the week helped. Silver was the stronger performer, settling at $67.15.
Price action suggests: A recovery from six-week lows, with buyers responding to the limited path rather than the hike itself.
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WTI Crude Oil |
$100.30 settle | three days lower |
WTI settled at $100.30, down 1.58 percent on Friday, with Brent at $103.87 and both easing for a third consecutive session as attention shifted toward diplomatic efforts around the conflict. Crude finished the week lower after reaching four-month highs, which gave equities and bonds some room to breathe. The caution is that $100 is still $100. Diesel set a record at $6.29 a gallon this week, and that cost is still flowing into freight, groceries, and everything trucks carry. A pullback from the highs eases pressure on inflation expectations, but it does not reverse the shock already working through the system.
Price action suggests: A pullback from four-month highs on diplomacy hopes, with price still accepted around the $100 area.
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EUR/USD |
DXY 100.22 | dollar +1.1% w/w |
The dollar index closed at 100.22, up roughly 1.1 percent on the week, and the euro eased accordingly. The ECB hiked last week and the Fed hiked this week, so on paper the rate differential barely changed. The dollar gained anyway, and the likely reason is the path rather than the level: sixteen of eighteen Fed officials see another move this year, while the ECB has given no comparable signal. When two central banks are both tightening, the currency market stops comparing today's rates and starts comparing how much further each is willing to go.
Price action suggests: Dollar strength driven by the expected path rather than the current differential.
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GBP/USD |
BoE held at 3.75% |
The Bank of England held at 3.75 percent on Thursday exactly as expected, and the pound softened against a broadly firmer dollar. The more interesting part of the BoE decision was not the rate at all but its choices on the balance sheet and quantitative tightening, which received far less coverage. That is worth noting alongside Warsh's own emphasis on a smaller balance sheet. Two central banks in the same week signalled that the next lever may be the size of their holdings rather than the price of money, and it is a quieter form of tightening that rarely makes headlines.
Price action suggests: Softness on a hold while the dollar firmed, with balance sheet policy the development to watch.
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USD/JPY |
~157.9 | yen fell on a hike |
This is the lesson of the week. The Bank of Japan raised its policy rate to 1.25 percent, the highest since April 1995, in the fastest pace of tightening in over three decades. The yen then weakened about 1.2 percent to around 157.9. We have argued for six weeks that only a narrowing rate gap would help the yen. The gap narrowed, and the yen still fell, because the vote was 7 to 2 and traders seized on the two dissenters who urged patience. Currency markets price the expected path, not the current level. A hike delivered alongside signs of internal resistance tells traders the next one may be slower in coming.
Price action suggests: Rejection of the hike as a yen positive, with the dissents read as a signal about pace rather than direction.
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USD/CAD |
oil eased, dollar firmed |
Both of the loonie's supports weakened together this week. Crude eased from four-month highs and the dollar gained more than 1 percent, so the energy tailwind we highlighted last week faded just as the greenback found strength. Canada published its own CPI this week alongside the Fed decision, adding a domestic input. The broader point still holds: among the seven markets we cover, Canada is the one clear beneficiary of expensive energy, and as long as crude sits near $100 that structural support remains, even in weeks when the dollar leg overwhelms it.
Price action suggests: Upward pressure as both loonie supports softened at once, with the structural energy advantage intact.
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→ Looking Ahead
| This wk |
The Trump and Xi meeting, with reports that new tariffs on China may be held back until after it. A recommended rate of 7.5 percent has been floated, with the final figure potentially higher. |
| Sep 25 |
August PCE, the Fed's preferred inflation gauge and the first major reading since the hike. |
| Oct 7 |
Minutes from this week's FOMC meeting, useful for seeing how the balance sheet discussion actually went. |
| Watch |
Odds of a second hike this year, which sat near 87 percent after Warsh spoke, up from 77 percent that morning. |
| Ongoing |
Diplomatic efforts around the conflict, which drove three straight days of lower oil and are now the main relief valve for inflation. |
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The Bank of Japan gave the yen the rate hike it had been waiting months for, and the yen fell anyway. That is the week in one sentence. Markets do not trade what just happened, they trade what they think comes next, which is why two dissenting votes outweighed the decision itself. It is also why the 2027 dots matter more than the 2026 ones. Three central banks moved this week and none of them can produce a barrel of oil. Let the data come to you, and stay patient.
Fed'n Markets
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Sources
Federal Reserve, Bank of Japan, CNBC, Schwab, Kiplinger, Chase, Investrade, Tickmill, Trading Economics, T. Rowe Price, and the Energy Information Administration. Market levels reflect closing prices for the week ending September 18, 2026, and are approximate general references, not official benchmark prices.
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