Fed Rate Hikes Constrained by Supply Shocks

The Federal Reserve's path to further interest rate hikes is constrained by supply shocks, according to John Velis at BNY Markets. He argues that current US inflation is driven by non-rate-sensitive components of core PCE, limiting how effective further tightening can be.

Velis expects the Fed to raise rates once more 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 current policy regime is more about preserving credibility and the Fed's inflation-fighting bona fides than about rate actions that will crimp inflation unless demand is similarly restrained, Velis said.