Federal Reserve Rate Hikes Constrained by Supply Shocks
Financial markets are anticipating further rate hikes from the Federal Reserve in 2026 and beyond. However, according to John Velis at BNY Markets, the path of these hikes is constrained by supply shocks driving current US inflation.
The non-rate-sensitive components of core PCE are the main contributors to the current inflationary pressures, limiting the effectiveness of further tightening measures, Velis argues. As a result, he expects one more rate hike in December 2026 but questions whether all the hikes priced for 2027 will be delivered.
The Fed's ability to proceed with as many hikes as the market has priced in is uncertain, Velis notes. Tightening policy may cool demand without affecting prices that are key contributors to current services inflation, potentially forcing the Fed to relent next year.