Federal Reserve: Strong jobs and CPI risks – BNY

BNY Markets strategist John Velis says a strong United States (US) jobs report has pushed expectations for a September Federal Reserve (Fed) rate hike back above 60%, despite Governor Christopher Waller’s more cautious comments. He expects the Fed to raise rates two or three times over the coming months, potentially taking policy above the roughly 4% neutral rate, before rates eventually decline as inflation eases and tighter financial conditions slow the economy.

Strong jobs data keep hikes live

"After an exceptionally strong jobs print on Friday, even Governor Christopher Waller’s somewhat equivocal comments on Thursday don’t seem to be enough to change our view that a rate hike is imminent."

"After dropping somewhat last Thursday on the basis of Waller’s remarks, the expectation for a September hike is back to over 60%. We would be surprised to not get one."

"The expected equilibrium neutral rate, observed across a variety of instruments, is still just above 4%. We’re some 40bp–50bp below that. Two hikes would get us there, but then we ask: do rates need to be restrictive, above and beyond 4%? It could well be the case."

"Our scenario now is that the Fed will raise rates two or three times in the next several months, although three consecutive hikes for the remainder of the year may wind up extending into 2027."

"By the second half of the year, we see rates coming down, as inflation starts to do the same – base effects alone will help here – and the economy looks to slow with tighter conditions."