Federal Reserve: December hike seen as cycle peak – BNY

In the rates outlook, BNY Markets’ John Velis expects no Federal Reserve rate increase in October, with markets pricing a low probability for an immediate move. He sees December as the next likely and final hike of this cycle, noting that implied policy rates out to December 2027 have eased from their most hawkish levels as inflation remains largely supply-driven.

Market pricing moderates future hikes

"We don’t expect an October rate hike next week, and market expectations agree. At present the market is pricing only a 17% chance of a hike at the next FOMC."

"We don’t regard the increase in CPI and PPI inflation as large enough to signal that inflation is worsening beyond current levels. Inflation remains driven by supply-side concerns (airfares, for example) or pricing dynamics that aren’t related to the stance of monetary policy (personal services, housing and health care, for example)."

"We do think December is the next likely opportunity for an increase in the federal funds rate and expect that to be the last hike in this cycle."

"We note that the implied federal funds rate for December 2027 is now only 4.64%, implying just under 75bp of additional rate hikes. These market expectations are actually slightly below their most hawkish levels from just a few weeks ago."

"We have argued that the peak 100bp (including the September hike) that had been priced in would be hard to realize, especially as we get into March and April 2027 when base effects will help lower the annual rate of inflation."

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