The Federal Reserve of the United States is unlikely to move towards an aggressive rate hike cycle, with only one more rate hike anticipated. This comes as energy prices continue to be seen as a key risk to the inflation outlook and the possibility of new tariffs that could renew price pressures.
Rate Hike and Its Analysis
The Federal Open Market Committee (FOMC) unanimously raised policy rates by 25 basis points, citing the "timely" return of inflation to its target. This increase marks the first since 2023, and policymakers took this decision to address ongoing inflationary pressures.
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According to a report from Axis Bank, while several inflation indicators, including the closely watched Personal Consumption Expenditures (PCE) index, have remained above 2% since 2020 and overall inflation has recently increased, the Federal Reserve's language indicates a focus on fundamental inflation trends, including core, median, and trimmed measures that continue to move towards the target.
Future Rate Outlook
The Axis Bank report notes that the Federal Reserve does not appear to signal a move towards an aggressive rate hike cycle, with only one more increase anticipated. Additionally, energy prices have been identified as a key risk for the inflation outlook. The bank predicts that the Federal Reserve may overlook a rate hike in October and have only one more increase until March 2027, while market expectations indicate another 75 basis points increase.
Federal Reserve Chair Kevin Warsh stated that this decision was a combination of a strong and resilient labor market, limited signs of easing inflation, and the deterioration of the geopolitical situation since the FOMC meeting in July. The Federal Reserve's new economic forecasts have also been updated, raising growth and inflation estimates.
The Federal Reserve also emphasized that the recent rate increase has helped strengthen its institutional credibility, especially considering the appointment of its Chair at a time when the President has opposed rate hikes.
Finally, Axis Bank has warned about the effects of new tariffs that may renew price pressures, stating that the impact of previous tariffs is now fading, but this trend could reverse if additional tariffs currently threatened are implemented.
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