Federal Reserve: Outlook becomes less clear after one further hike in 2026 – BNY

With inflation largely driven by supply pressures and expectations remaining anchored, according to BNY Markets’ John Velis, he questions whether higher interest rates can tackle those pressures. Nevertheless, following the Federal Reserve’s latest decision to hold rates, he continues to expect one further increase in December to safeguard its credibility. The outlook becomes less clear heading into 2027, with Velis warning that demand-side risks could warrant further tightening later.

December rate hike expected as 2027 outlook remains unclear

"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.)