A Dramatic Shift in Expectations: Is a December Fed Hike Now Inevitable?
A recent Reuters survey of economists points to a substantial recalibration in market expectations for the Federal Reserve's policy trajectory, marking a near-complete reversal from consensus views just one month prior.
October on Hold, December in Play: Unanimity Emerges
The survey found that 94 out of 100 economists forecast the Federal Open Market Committee (FOMC) will keep the federal funds rate target range steady at 3.75% to 4.00% at its October meeting. More strikingly, all 100 respondents anticipate the Fed will implement a rate hike at its December meeting. This stands in sharp contrast to last month's survey, where fewer than half of economists held that expectation.
This shift occurs as policymakers continue to signal patience, despite persistent inflation figures that arguably call for a more forceful policy response.
The Tension Between a Strong Economy and Perceived Policy Lag
Commenting on the situation, Alex Pelle, Senior US Economist at Mizuho Bank, suggested the economic backdrop simplifies the Fed's decision. "The economy is strong, inflation is elevated. Continuing to hike is almost the obvious choice here," Pelle stated.
He highlighted a potential dilemma for the central bank: "The unfortunate part is that the Fed isn't really in better control. They seem to be standing still, maybe even a little behind the curve. From a policy perspective, not hiking in October is the wrong decision."
The Path Ahead: More Than 25 Basis Points?
Speculation about subsequent actions runs deeper. Pelle added, "The base case is a 25-basis-point hike in December. But a 50-basis-point hike is more likely than no hike at all." This implies that if inflation fails to cool as projected, the Fed may need to adopt a more aggressive tightening pace than currently priced in by markets.
The near-unanimous expectation indicates that financial markets and professionals are reassessing their judgment of the central bank's resolve to combat inflation, bracing for a potential policy adjustment by year's end.