Natixis projects one more Fed hike in December, then a pause

Fed Governor Lisa Cook cast a dissenting vote against the majority decision to hold rates steady, her first such break since joining the board in 2022. Two officials who had previously pushed for tighter policy, Lorie Logan of the Dallas Fed and Neel Kashkari of the Minneapolis Fed, had both opposed the July pause but did not dissent this time.

Natixis analysts Christopher Hodge and Selin Aker observed that the latest hold follows earlier signals from New York Fed President John Williams and Vice Chair Philip Jefferson suggesting back-to-back hikes were not an immediate priority. They argued that persistent inflation, resilient economic growth and a stable unemployment rate make a rate increase in December almost certain unless the data takes an unexpected turn.

Reviewing the central bank’s statement wording, the pair highlighted a shift in how officials described the economy, upgrading it from “solid” to “strong,” while signaling they would await more data before deciding their next step. According to Hodge and Aker, this suggests the Fed wants additional time to assess whether September’s surprisingly elevated inflation figure was an isolated spike or the start of a sustained climb.

Speaking after the meeting, Fed Chair Kevin Warsh cited strong underlying growth momentum, record levels of business investment and tight labor market conditions, while stressing the Fed’s commitment to bringing inflation down further. He also announced changes to how FOMC meetings will be structured going forward: starting in 2027, one of the year’s eight meetings will be set aside purely for strategic policy discussion with no formal vote, rising to two such sessions in 2028. Warsh did not clearly explain the reasoning behind this particular hold decision, and voiced skepticism that spending tied to artificial intelligence is immune to interest rate changes, noting that credit spreads linked to AI had widened somewhat even as broader capital expenditure strength extended beyond that sector.

Natixis expects the Fed to stay focused on inflation in the near term, but its economists believe that slower growth combined with declining energy costs and diminishing tariff pressures will eventually ease price pressures, supporting their call for a single additional Fed rate hike in December to close out the tightening cycle. They noted this outlook depends on how inflation and growth data develop in the months ahead.

Fed policy moves continue to influence Treasury yield and dollar expectations. Signals pointing to a Fed rate hike in December tend to strengthen the dollar and short-term yields, while signs of cooling inflation or weaker growth could push both lower.

Source: Kitco News