The Fed interest rate announcement didn't surprise most traders. But, the scale of the increase in future projections was surprising.

This morning, the Federal Open Market Committee (FOMC) announcement aligned with most market participants' expectations. The Fed's top policymakers did not change interest rates but signaled further rate hikes of 50 basis points by the end of this year.

The US dollar index (DXY) responded to the announcement by moving modestly from below the 103.00 thresholds to the 103.20s. But there is no clear sign of trend acceleration, either upwards or downwards, due to low liquidity between the end of the New York session and the beginning of the Asian session (June/15).

DXY

The FOMC meeting participants agreed that "holding the target range (interest rate between 5.00%-5.25%) steady at this meeting allows the Committee to assess additional information and its implications for monetary policy". At the same time, the latest predictions show that most believe interest rates need to be raised further.

FOMC expects the Fed funds rate to peak at 5.6% in late December, suggesting two further 25 basis point rate hikes over the rest of the year. The prediction exceeds the 5.1% terminal rate peak estimate released after the May FOMC meeting.

The Fed's decision was not a surprise to most traders. Yet, the scale of the increase in the forward projection was surprising. Last month, the St. Louis Fed President had expressed the need for a further 50 bps rate hike, but traders at that time still expected the Fed to hike by 25 bps only and then cut it slightly before the end of the year.

"As much as inflation is moving in the right direction, it is moving slowly, and the Fed remains frustrated with its inability to move the needle on the unemployment rate," said Chris Low, chief economist at FHN Financial in New York, cited from Reuters. "The biggest surprise in the statement and SEP (summary of economic projections) is not the pause or the intent to resume hiking, it is the amount the Fed wants to hike."