Interview, Other
Signals & Noise: Our case for 3 rate hikes this year
- Base case scenario anticipates three 25-basis point rate hikes scheduled for September, October, and December of this year to reverse the 75 basis points of cuts from last fall.
- Further rate increases are deemed warranted as core PCE inflation is projected to persist near 2.5% even without new shocks, necessitating a restrictive policy stance.
- A plausible alternative scenario posits that Chair Walsh may utilize task forces to delay action, potentially justifying a pause with revisions and fading tariff effects, though this risks eroding credibility if markets perceive underlying inflation remains subsided.
- If inflation overshoot is deemed persistent, the yield curve may steepen with long-end break-even inflation reflecting expectations of prolonged inflation.
- Incentives favor immediate action by the Fed to build market credibility without inheriting the inflation legacy of the previous administration; failure to hike this year could result in the perception of being behind the curve next year.
- Anticipated rate adjustments would likely be substantial, with a minimum of 50 basis points if hiking begins, and potentially 75 basis points to tighten financial conditions to a typical mid-cycle adjustment magnitude.
- The outlook is not premised on a sustained surge in energy prices, though several months of softer inflation readings would be required for underlying trends to appear less concerning.