Supply-Driven Inflation May Limit Fed Tightening, BNY Markets Warns

BNY Markets is warning that supply-driven core PCE inflation may limit the Federal Reserve's ability to tighten monetary policy and temper expectations for future rate hikes.

The firm believes that one additional rate rise in December 2026 is likely, but casts doubt on whether the full set of hikes priced by markets for 2027 will materialize due to the supply-driven nature of inflation and the risk of demand destruction.

BNY argues that if tighter policy suppresses demand but leaves prices driving services inflation largely untouched, the Fed may be forced to ease its stance next year. The firm also notes that even if energy prices fall and deliver a positive supply shock, demand-led inflation pressures could still re-emerge.