Federal Reserve: One further hike in 2026 before policy path becomes less clear – BNY

One further Federal Reserve rate hike in December remains the expectation of BNY Markets’ John Velis, who believes the move would safeguard the central bank’s credibility following its latest decision to hold rates. Beyond that, he considers the outlook heading into 2027 less clear. With inflation largely driven by supply factors and expectations still anchored, Velis questions whether higher rates can ease supply pressures. Demand-side risks, however, could warrant further tightening later, he cautions.

What follows a December rate hike as the 2027 outlook grows less clear?

"After last week’s anticipated hold by the FOMC, we maintain our view that there will be one additional rate hike in December this year, to preserve Fed credibility. Heading into 2027, the landscape appears much murkier."

"Yes, inflation remains high, and the recent bout of higher oil prices will undoubtedly keep the pressure on prices. We’ve argued, and continue to argue, that inflation is mainly supply driven, and that inflation expectations remain well anchored over long horizons."

"We’re not convinced that higher rates will be able to rein in supply pressures, as they are indeed a demand-management tool. Nevertheless, it bears watching to see if demand-side pressures emerge in 2027, in which case interest rate remedies would be appropriate."

"We noted with some interest Warsh’s assertion at last week’s press conference that the interest rate hike in September tightened financial conditions meaningfully, since aside from the AI-related wobbles in October, there’s scant evidence of such tightening pervading across the real economy."

"Still, should financial jitters persist, conditions will naturally tighten, requiring fewer hikes in 2027 than the two currently priced in."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)