Federal Reserve: One more 2026 hike then murkier path – BNY

BNY Markets’ John Velis maintains the view that the Federal Reserve will deliver one additional rate hike in December to preserve credibility after its latest hold. He sees a murkier outlook heading into 2027, arguing inflation is mainly supply-driven and expectations anchored. Velis doubts higher rates can address supply pressures but warns demand-side risks could justify more tightening later.

December hike then uncertain 2027 path

"After last week’s anticipated hold by the FOMC, we maintain our view that there will be one additional rate hike in December this year, to preserve Fed credibility. Heading into 2027, the landscape appears much murkier."

"Yes, inflation remains high, and the recent bout of higher oil prices will undoubtedly keep the pressure on prices. We’ve argued, and continue to argue, that inflation is mainly supply driven, and that inflation expectations remain well anchored over long horizons."

"We’re not convinced that higher rates will be able to rein in supply pressures, as they are indeed a demand-management tool. Nevertheless, it bears watching to see if demand-side pressures emerge in 2027, in which case interest rate remedies would be appropriate."

"We noted with some interest Warsh’s assertion at last week’s press conference that the interest rate hike in September tightened financial conditions meaningfully, since aside from the AI-related wobbles in October, there’s scant evidence of such tightening pervading across the real economy."

"Still, should financial jitters persist, conditions will naturally tighten, requiring fewer hikes in 2027 than the two currently priced in."