Federal Reserve: Hiking path constrained by supply shocks – BNY
John Velis at BNY Markets argues that current US inflation is being driven by non-rate-sensitive components of core PCE, limiting how effective further Federal Reserve tightening can be.
BNY Markets analyst John Velis contends that existing US inflation is being driven by non-rate-sensitive components of core PCE, thereby constraining the efficacy of additional Federal Reserve tightening. He anticipates one more rate increase in December 2026 but queries whether all hikes anticipated for 2027 will materialize, considering the type of inflation shock and the possibility of demand destruction.
The Federal Reserve is projected to raise rates once more in December 2026. For the remainder of 2027, the likelihood of the Fed executing as many hikes as currently priced by the market hinges on the effectiveness of tighter policy. If tightening results in cooling demand without impacting the key prices fueling current services inflation, the Fed may need to pause its tightening efforts next year.
This perspective does not negate the decision to raise rates or the expectation of continued rate hikes. Instead, it emphasizes that the present policy stance is more focused on maintaining credibility and demonstrating the Federal Reserve's commitment to fighting inflation than on rate actions that would independently suppress inflation, unless demand is similarly curbed.
While the market currently perceives the hawkish pricing, the team remains vigilant for unintended consequences that could alter the outlook. Even if there is a temporary relief in energy prices, indicative of a positive supply shock relative to the current situation, it does not necessarily negate the potential for traditional demand-driven inflation.
Written by urgent.news from FXStreet's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
