Federal Reserve: One-off September hike view – ING

ING economists James Knightley, Padhraic Garvey and Chris Turner now expect a 25bp Federal Reserve rate hike in September following Chair Kevin Warsh’s Jackson Hole remarks. They argue the move will be a one-and-done adjustment rather than the start of a tightening cycle, with weak wage growth and softer housing helping inflation converge to 2% next year and Fed funds ultimately returning to 3.1%.

September move seen as one-off

"We changed our view to a 25bp Federal Reserve rate hike in September in the wake of Chair Kevin Warsh’s address at the Jackson Hole symposium. The data since then has justified that decision. Our projections for jobs and inflation suggest no need for a series of hikes."

"Ordinarily the assumption is that if the Fed hikes, they don’t just go once. Financial markets are now pricing two and a half further rate hikes after the all-but-assured 16 September move. However, this time around we think that one and done might be the case."

"Since the Federal Reserve's last forecast update, we saw a weaker than expected 2Q GDP report, a softer trend in job creation, notwithstanding the August surprise, while inflation has shown some encouraging signs of decelerating, even if the year-on-year rate remains above 2%. We continue to argue that weak wage growth, tariff refunds and a stagnant housing market, which will slow shelter inflation, will all contribute towards a convergence on the 2% inflation target next year. The risk is energy prices."

"In general though, we expect the Fed to project slightly lower inflation than they had in their June forecast while the GDP and labour metrics are little changed. We expect them to have 4% as their end 2026 and end 2027 Fed funds forecast before it heads to their previous long-run projection for the Fed funds rate of 3.1%."

"Yet the dollar does not need to rally too far. After all, we think this is a recalibration of Fed policy, not a new cycle. And our house view remains for the dollar to decline through next year – especially in the second quarter when US inflation is back down to target and money markets can switch their focus to easing from tightening."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)