Jan Hatzius, Chief Economist at Goldman Sachs, stated that the Federal Reserve may opt for two additional rate hikes rather than just one in December.
Following hawkish remarks by Federal Reserve Governor Christopher Waller at the Central Bank of the Republic of Turkey Forum in Istanbul, Jan Hatzius, Chief Economist at Goldman Sachs, indicated that the Federal Reserve may choose to raise interest rates twice more, instead of limiting increases to a single hike in December.
In a report, Hatzius noted that two additional rate hikes might be more appropriate, while the probability of only one hike in December has declined. The analyst remarked that Waller’s speech marked a shift in his stance from previously emphasizing the three-month annualized core PCE inflation rate to a more hawkish position. Nevertheless, Goldman Sachs still expects the Federal Reserve to raise rates by another 25 basis points in December.
What did Waller say?
Waller’s comments on Thursday suggested that further interest rate hikes might be necessary to curb rising inflation and bring it back to the Federal Reserve’s 2% target, adding that there is “flexibility” in the pace of rate increases.
In his prepared remarks, Waller stated, “If economic data continue to align with expectations, I anticipate further rate hikes to support a more timely return of inflation to our 2% target.”
“However, there is some flexibility regarding when these rate hikes will be implemented. Rate increases do not need to occur at consecutive meetings, but they should be in place within an acceptable timeframe.”
These remarks came shortly after the release of the minutes from the Federal Open Market Committee (FOMC) meeting, which showed that 19 Federal Reserve officials supported a rate hike in September.
In September, the Federal Reserve raised its benchmark interest rate by 25 basis points to a target range of 3.75%-4%, marking its first rate increase in approximately three years. The dot plot projections indicated that most Federal Reserve officials expect an additional 25 basis point hike before the end of the year.
According to data from the CME FedWatch Tool, the probability of a 25 basis point rate hike in October stands at 17.7%, while the probability of cumulative rate hikes of up to 50 basis points by December is 83.7%.
Multiple macroeconomic catalysts point to an impending interest rate hike.
Waller also emphasized that although the war in Iran has caused energy price shocks, and debt expansion driven by the artificial intelligence construction boom has intensified new concerns about inflationary pressures, the rationale for raising interest rates has become clear as the economy strengthens.
Waller stated, "There is evidence that economic activity is strengthening in the second half of this year, and I am not overly concerned that tightening monetary policy will trigger a disruptive economic slowdown. However, I am concerned that the recent acceleration in inflation... will lead consumers, investors, and price-setting firms to raise their expectations for future inflation."
He pointed out that policymakers would signal the direction of interest rates, adding, "Such signaling helps anchor the short-term interest rate path while providing flexibility to adjust rate hikes based on newly released data."
Edited by lambor