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This week, the Fed raised rates by 25bp after a pause in June. However, they left the door open for another hike in September.
The analysts said they think the Fed will continue to hike further. “We continue to believe that financial markets are underestimating the amount of tightening the Fed will need to do to moderate a resilient economy and engender sufficient confidence among FOMC members that inflation is on a sustainable and durable path to 2.0% inflation outcomes,” they wrote.
“While it is good news that the disinflation process has continued alongside low unemployment, solid labor market demand, and stronger-than-expected growth outcomes so far this year, these conditions are likely to keep the Fed worried that its policy stance is insufficiently restrictive,” they added, noting comments from Fed Chair Powell.
The firm retains its outlook for another 25bp rate hike in September based on the view that the “totality of the data is likely to be strong enough to justify further policy rate tightening.”
“We think a lot would have to go right to keep the Fed on the sidelines. That said, we cannot rule out that the committee will delay action until the November meeting,” said the analysts. “In addition, we retain our outlook of higher-for-longer policy rates and do not look for the first rate cut until May 2024.”
