Federal Reserve: October hold likely, December hike expected - ABN AMRO

ABN AMRO’s Rogier Quaedvlieg expects the Federal Reserve (Fed) to keep rates unchanged at 3.75–4.00% this week, despite recent upside inflation surprises. He argues that declining inflation breadth and a cooling US labour market give policymakers time to wait. The bank still forecasts one final 25bp hike in December, followed by an extended period of unchanged rates.

Fed seen pausing before final hike

"We expect the Fed to leave the policy rate unchanged at 3.75-4.00% on Wednesday. The decision is more finely balanced than market pricing suggests. Inflation has surprised to the upside for a second month, but declining inflation breadth and a cooling labour market give the Fed room to wait. We therefore expect the Fed to pause in October before delivering a final 25bp hike in December."

"The report is unlikely to have given the Fed confidence that inflation is returning sustainably to 2%. The concern is less the initial energy shock, which monetary policy cannot prevent, than its potential propagation. Persistent input-cost increases raise the risk that firms pass these costs on to consumers and, ultimately, that higher inflation feeds into wages. Restrictive policy provides insurance against those second-round effects. Still, there are reasons not to overreact to two hot prints. Inflation breadth continues to improve, suggesting that the recent acceleration has not yet developed into a generalised inflation process. Moreover, some of the factors currently boosting PCE inflation look set to fade, particularly the unusually large contribution from software and, somewhat later, memory chips. We therefore expect underlying inflation to resume its decline next year, even if near-term readings remain uncomfortable."

"Combined with the recent softer PCE readings, the labour data remove much of the pressure to hike immediately. The Fed can afford another six weeks to assess whether the latest inflation strength represents persistent pressure or another temporary bump."

"The mix of persistent near-term inflation risk and a cooling labour market argues for patience rather than complacency. We expect the Fed to hold in October, deliver one final 25bp hike in December, and then keep rates unchanged for an extended period."

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