Warsh Dot Plot Shifts Higher, Markets Price October Hike

The yield curve bear steepened, with front-end yields rising as much as 13.2 basis points. The 2-year Treasury yield climbed to 4.20%, a level last seen in February 2025. Money markets now fully price a rate hike by October, based on fed funds futures pricing. The dollar rallied on the rate support. EUR/USD fell from above 1.1600 to briefly below 1.1500, approaching the August 2025 low at 1.1392.

Risk assets felt the squeeze. Major US equity indices fell 1.0% to 1.35% as investors adjusted to the prospect of tighter financial conditions. The combination of higher real yields and a more hawkish Fed poses a challenge for risk appetite.

BCB's Rate Cut: Smoothing Cycles, Not Fighting Inflation

Separately, the Brazilian central bank cut its policy rate by 25 basis points to 14.25% despite rising inflation expectations. Headline inflation for this year is now forecast at 5.2%, up from 4.6%, and 3.7% for end-2027. The BCB justified the cut by arguing that monetary policy must support economic stability and employment. "Without compromising its fundamental objective of ensuring price stability, this decision also implies smoothing economic fluctuations and fostering full employment," the bank said. The central bank indicated that projected inflation at the next relevant policy horizon is expected to fall below target, providing room for a gradual easing cycle.

The next market focus will be on inflation releases over coming months. With risks skewed to the upside, each print could shift rate expectations further. The Fed's data-dependent stance, as articulated by Warsh, means the data, not the central bank's reaction function, will drive the next move.