• The Fed hiked its policy rate by 25 bps to 3.75% - 4.00% for the first time since 2023, as widely  anticipated by the futures market. The statement highlighted an upbeat economy coupled with elevated  inflation. The above $100/bbl oil price, a stable labor market, and market pressure to hike rates (with  over a 90% implied probability of a hike) made way for the decision. DXY rose by 0.6% following the  hawkish statement, while the UST 10y yield remained stable. 
• Warsh had hinted at this move in his Jackson Hole speech, stating that the Fed still had more work to  do if inflation failed to move toward its objective. On the one hand, the move reinforces Warsh’s  credibility and the Fed’s independence. On the other hand, the U.S. government favors interest rates falling below 1%.
• The hike is unlikely to be a one-time event, as the Fed board projects at least one more hike this  year. The board views the US economy as more resilient than previously projected, with higher GDP  growth, lower unemployment, and faster core PCE inflation. Warsh continues to refrain from  participating in the projections, and his Five Task Forces are expected to share their findings by the  year-end. 
• The higher-for-longer outlook is supported by the current inflation trend, with core PCE standing  at 3.3% YoY. With the US-Iran war continuing and even spreading to Saudi Arabia and the Houthis,  there is little chance of inflation declining smoothly without decisive intervention. 
• Given the ongoing market momentum (NASDAQ only down 0.1%), there is little chance for the Fed  to ease its policy or even adopt a dovish tone. As such, we can expect the higher-for-longer rate  environment to persist, unless there is a market crash, meaning the Fed’s rate has only one direction  to go. One caveat is whether the Warsh-promised “regime change” could bring interest rates down by  tightening liquidity through shrinking the Fed’s balance sheet or through other policy tools. 
• Even though the dollar strengthened, the effect on the Rupiah has been more muted, as it weakened  by only around 0.3% after the market had been open for a few hours (cf. 0.6% on the dollar index).  For now, the Rupiah continues to be defended through other means aside from a rate hike. However,  global monetary tightening will of course put pressure on Bank Indonesia. The question is how long the  Rupiah can keep up with tightening global liquidity. Thus, we still expect BI to hike rates at least  once more. 

The full version of this report (and previous reports) can be accessed via the following link: https://s.id/BCA_REI