By COMFORT OGBONNA
Barclays now expects the U.S. Federal Reserve to raise interest rates by 25 basis points in both September and December, reversing its earlier forecast that the central bank would leave rates unchanged for the rest of the year.
The revised outlook follows comments from Federal Reserve Chair Kevin Warsh that were viewed by financial markets as a stronger indication that policymakers remain concerned about inflation and could consider further monetary tightening.
Speaking at the Federal Reserve’s annual economic symposium in Jackson Hole on Friday, Warsh said policymakers would have more work to do if they were not confident that inflation was moving back toward the central bank’s 2% target.
His remarks represented his clearest indication so far that additional interest rate increases could be necessary if inflation fails to show sufficient progress.
Warsh said inflation remains too high and argued that financial conditions are not restrictive enough to ensure price pressures continue to ease. He also described the labor market as broadly consistent with full employment, reinforcing the view that the central bank can continue focusing on inflation without placing excessive weight on weakening employment conditions.
Barclays characterized the speech as notably hawkish, saying Warsh had presented an implicit argument for additional monetary tightening while continuing to avoid offering investors explicit forward guidance on the Fed’s future decisions.
The brokerage had previously expected the Federal Reserve to keep interest rates unchanged through the remainder of the year. Its latest forecast now calls for a quarter-point increase in September followed by another 25-basis-point increase in December.
The shift reflects growing concern that inflation could prove more persistent than previously expected. Barclays said it continues to anticipate that monthly inflation readings could be significantly softer than longer-term measures, but warned that unfavorable base effects could make progress on those broader inflation measures more difficult through the end of the year.
The Federal Reserve has been closely monitoring both inflation and employment as it determines the appropriate path for interest rates. A higher-for-longer interest rate environment could continue to affect borrowing costs for households and businesses while also influencing financial markets and investment decisions.
Investors have already begun adjusting their expectations following Warsh’s comments. Interest rate futures were pricing in a 60.4% probability of a September rate increase, according to the CME Group’s FedWatch tool.
That represented a significant shift in market expectations as traders assessed the possibility that the Fed could resume tightening monetary policy sooner than previously anticipated.
Attention is now turning to the Federal Reserve’s Sept. 16 policy meeting, where investors will look for further indications about the central bank’s assessment of inflation, employment and economic growth.
The September decision will be particularly important for financial markets because policymakers will have access to additional economic data before deciding whether inflation has eased enough to justify holding rates steady or whether further increases are needed.
A second rate increase in December would depend on how inflation and labor-market conditions develop during the final months of the year. If price pressures remain elevated, policymakers could face increased pressure to maintain a restrictive stance. Conversely, clearer evidence of sustained disinflation could reduce the need for additional increases.
For now, Barclays’ revised forecast signals that the brokerage sees a greater risk of renewed monetary tightening than it did previously, while financial markets are also increasingly positioning for the possibility of higher interest rates in the months ahead.
Original article
Comments