Fed Rate Hike Imminent as Markets Price Near 100bp of Tightening

BNY's John Velis expects the Federal Reserve to raise interest rates by 25bp at this week's FOMC meeting, in line with implied market probabilities. The Fed is likely to feature one or more dissents in favor of a hold from less hawkish members of the Committee.

Velis believes that while markets are pricing nearly 100bp of tightening through the end of 2027, the US economy may struggle to sustain such restrictive rates for long. He sees increasingly hawkish global policy expectations and pressure on longer-dated bonds.

Velis also warns that shorter-maturity yields may ultimately have moved too far. The market currently sees a total of nearly four rate hikes (equivalent to 100bp) through the end of next year, but Velis thinks that by then, the economy won't be able to handle rates that high for very long.