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Andrew Hollenhorst, Citi Chief U.S. Economist, believes a 100bp rate hike at next week’s FOMC meeting is “possible but relatively unlikely.”
Citi’s base-case scenario calls for a 75bp rate hike in September and 50bp hikes in November and December. Another 25bp rate hike would follow these actions in February. Citi also sees rising unbalanced upside risk to policy rates.
“Another upside surprise to core inflation upends the slowing core inflation narrative and not only assures another larger policy rate hike next week but also makes it more difficult for Fed officials to justify slowing the pace of hikes in November and beyond,” Hollenhorst said in a client note.
Still, the economist leaves the door open for a 100bp rate hike as the Fed already surprised markets in June when it guided to 50bp but delivered a 75bp rate hike.
“We would suspect Powell and the Committee are comfortable with the tightening of financial conditions after Jackson Hole and yesterday’s inflation reading. A hawkish message could be sent through press conference rhetoric and higher “dots” in the summary of economic projections, rather than a larger hike size,” Hollenhorst added.
The pace of aggressively raising interest rates will slow when the FOMC feels “some notion of restrictive policy has been reached,” Citi’s top U.S. economist concluded.
