Fed Bets on Higher Rates Amid Strong Jobs Data

Markets strategist John Velis at BNY says a strong US jobs report has increased expectations for a September Federal Reserve rate hike to above 60%. He believes the Fed will raise rates two or three times over the coming months, potentially taking policy above the roughly 4% neutral rate. However, he expects rates to decline as inflation eases and tighter financial conditions slow the economy.

Velis notes that even Governor Christopher Waller's cautious comments haven't changed his view on an imminent rate hike. The expected equilibrium neutral rate is still just above 4%, with current interest rates around 40-50 basis points below this level. Two hikes would get us there, but Velis wonders if rates need to be restrictive beyond 4%.

He predicts the Fed will raise rates two or three times in the next several months, although consecutive hikes for the remainder of the year may extend into 2027. By the second half of the year, he sees rates coming down as inflation starts to ease and the economy slows with tighter conditions.