Forex
BNY: Federal Reserve's Inflation Fight Limited by Supply Shocks
According to John Velis at BNY Markets, current US inflation is being driven by non-rate-sensitive components of core PCE. This limits how effective further Federal Reserve tightening can be.
Velis expects one more rate hike in December 2026 but questions whether all the hikes priced for 2027 will be delivered. The answer hinges on how effective tighter policy can be given the current inflation shock and potential demand destruction.
The Fed's policy hikes face structural inflation limits, Velis notes. If tightening cools demand without affecting prices that contribute to current services inflation, the Fed may have to relent next year.