© Reuters. Barclays now expects the Fed to hike in December
Barclays has adjusted its projection in response to recent communication from the Federal Open Market Committee (FOMC), which suggests a potential pause at the upcoming November meeting.
Despite the strength seen in the labor market, economic activity, and (CPI) inflation data, Barclays decided to postpone the previously anticipated 25 basis point rate hike to December.
Rising bond yields provide the FOMC with more time to assess the incoming data before considering another rate hike, according to the bank’s strategists.
“Most FOMC participants appear to be interpreting the recent increase in longer-term yields as a tightening of financial conditions and expressed the view that it might stand in for a policy rate increase,” the analysts wrote in a note.
Previewing today’s Powell speech, the strategists think the message will be aligned with Waller’s and Williams’.
“We view it as unlikely that Waller and Williams would have delivered such messages if they knew that Powell would instead make the case for a November hike.”
Governor Waller, who had previously held hawkish views, recently indicated a shift in his stance, leaning toward a pause at the November meeting. He considered two scenarios for the economic outlook:
In the first scenario, where aggregate demand gradually aligns better with supply and inflation moves towards the 2% target, he favored keeping the policy rate unchanged. This suggests a preference for a wait-and-see approach when economic conditions are stabilizing.
The alternative scenario involves continued strong demand and economic activity, which might exert persistent upward pressure on inflation. In this case, he would consider the possibility of additional rate tightening.
He noted that it’s still too early to make a definitive decision at this point, suggesting a cautious and data-dependent approach to monetary policy.
“We continue to think, however, there is a strong case for at least another rate hike, assuming that longer-term yields do not continue to rise sharply.” “We think that the higher longer-term rates reflect in part the stronger economy and that more tightening still needs to take place to slow the economy and bring inflation back toward the 2% objective,” the analysts concluded.