Federal Reserve: Rate Cycle Expected to Peak With December Hike – BNY

Markets are assigning a low probability to an immediate Federal Reserve rate rise, in line with BNY Markets’ John Velis, who expects no increase in October. With inflation still largely driven by supply factors, he notes that implied policy rates through December 2027 have retreated from their most hawkish levels. Velis considers December the next likely opportunity for a hike and expects it to be the last of this cycle.

Is market pricing tempering expectations for further rate 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.)