Lloyds Market Insights FX Factors 170926 USD

Market Insights : FX Factors 17 September 2026

Ebb and flow… • Chair Warsh builds on his Jack son Hole momentum with unanimous Fed Funds hike d ecis ion • Th e quarter point increase looks the opening salvo in a mor e sus tained anti -inf lation w ar • H awkish dot shift is just on e step in a pro ce ss amid a h ot economy and persi stent ext ernal risk s • Th is US grow th and yield story is helpful eno ugh for USD, but negative risks elsewher e ad d to that

Warsh commits Nicholas Kennedy FX Strategy Jackson Hole got the ball rolling, but the S eptember FOMC is likely to be seen as the de fining moment for W arsh’s tenu re as Chair. The Email language on the Fed ’s inflation objective might have remain ed the same in the policy sta tement “the Committee will deliver price stabilit y”, but he followed that up with a 25bps rate hike (to 3.75 -4.00%) , supported Team mailbox unanimous ly by the rest of the b oar d . And w hile his press conference might have been relatively brief , he used th e opportunity to restate all of the hawki sh macro -observations he made back on 28 August . To our mi nd th at cor rects f or his early communication missteps and ma rks out a more defining c ommitment to th e inflation fight .

Fed's Summary of Economic Projections: September 2026

GDP U-rate PCE Core PCE Jun Sep Chg Jun Sep Chg Jun Sep Chg Jun Sep Chg 2026 2.2 2.3 +0.1 3.3 3.4 +0.1 2.1 2.2 Longer run Table 1 Date: 17-Sep-26, Source: Federal Reserve, Lloyds Bank Market Insights

While some might have observed t hat the FOMC’s assumptions for the Fed Funds rate still aren’t as hawkish as the market (so the decision isn’t as hawkish as it could have been ), we ’d take the vi ew that everything starts somewhere . Fed forecasts always move incrementally, which reflects the methodology of the contributors and the evolution of data between each S ummary of Econ omic Projections (SE P) revis ion (Table 1). So , this round of estimates was never going to converge with aggressive market assumptions in one step — the O IS curve was expecting a cycle of almost four hikes going into Thursday ’s meeting . Shifting to a position whereby a further hike this year is now the Fed ’s central scenario, with four dots now expecting two further increases (i.e. at each of the remaining 2026 meetings ), is a reflection of th is evolutionary nature . The profile was never a concrete commitment , ev en before “no forward guidance ”. A further upward shift is likely in

December if inflationary pressures continue to trouble and/or the economy accelerate s further . That is a consistent and credible approach, and one that real ly carries over from the last regime.

Summary of Economic Projections (Sep '26): Median Fed Funds Rate, % 5.0 Dec-25 Mar-26 Jun-26 Sep-26 Current Effective Fed Funds Rate Current Yr 1st Yr 2nd Yr Longer-run Figure 1 Date: 17-Sep-26, Source: Federal Reserve, Lloyds Bank Market Insights

If you wanted a clear er measure of underlying hawkishness , you just have to look at the evolution of the balance of the plot (Figure 1) . The median dot shifted up markedly over the horizon , 50b ps f or both 2027 and 2028 compared to the 30bps increase seen for rates this year . The long -run rate meanwhile continues to edge higher, now sitting at 3.2% . T he committee thinks the neutral Fed Funds rate is still r ising . Warsh backed all that up by reminding of robust domestic econom ic performance , noting the labour market side of the F ed ’s remit was in “good shape ” while credi t flows were robust. The downward revisions to unemployment and upwar d revisions to growth reinforce that tight backdrop. H e placed fu rther emphasis on the point that financial conditions were not restrictive , describing September ’s hike as “remov ing a dose of accommodation ”. That is not a description of mov ing policy into restrictive territory . A gain , the Chair downplay ed the better inflation data recorded over the summer , focusing on the persistence of above target data (for over five years , sig h), with too many categories still rising fas ter than 3% . Moreover, price risk s were skewed to the upside (Middle East uncertainties a central component of that) , leaving the…