Fed Hike Path Constrained by Supply Shocks

BNY Markets' John Velis believes that current US inflation is driven by non-rate-sensitive components of core PCE, limiting the effectiveness of further Federal Reserve tightening.

The core Personal Consumption Expenditures (PCE) price index, a key inflation metric for the Fed, has been influenced by supply shocks rather than demand-driven factors. As a result, Velis expects only one more rate hike in December 2026, questioning whether all the hikes priced for 2027 will be delivered.

Velis argues that policy hikes are facing structural inflation limits and may not be able to curb inflation effectively unless demand is restrained. He notes that even if there's a welcome relief on energy prices, traditional demand-driven inflation cannot be ruled out.