The forecaster who was first to call the Federal Reserve's most recent rate hike now says a larger, 50 basis point increase may come in December.
Prestige Economics president Jason Schenker said he does not think the Fed is likely to raise rates at this month's meeting. Instead, he believes the Fed may let its September hike "catch its breath" before possibly delivering a larger increase in December.
"By December, if inflation has not been contained in a more meaningful way after the September hike, they may choose to raise rates by 50 basis points rather than 25 basis points, taking a bigger bite," Schenker said.
Fed Chair Kevin Warsh brought the Fed into a rate-hiking mode last month — the first since 2023 — in an attempt to curb rising inflation. While many economists expected that hike in the weeks before the September meeting, Schenker was the first among surveyed economists to predict it back in June.
Schenker writes forecasts at Prestige, which is frequently among the highest-ranked currency forecasters on Bloomberg's leaderboard.
Recently, the focus of discussion among traders and economists has been whether the Fed will raise rates by another 25 basis points this month or save that hike for the December meeting. Swap markets have fully priced in a 25 basis point hike in December. After surging fuel costs drove consumer inflation above economists' expectations, the probability of an October hike in futures markets briefly rose above 50%, before pulling back on Wednesday.
Schenker, however, believes the Fed will not have enough information at its October meeting to act again, because a large portion of the data released on Wednesday was collected before the Fed's September hike.
"I think there are not enough data points to give them the kind of confidence they may need," Schenker said.
Meanwhile, between the October and December meetings, Fed officials will also receive two employment reports and one CPI reading, which can inform future decisions.
"It's just a six-week wait, but they will get more data," Schenker said. "If they see that 25 basis points did nothing, then I think they may come out with 50 basis points."
Schenker expects that a larger hike could mean a pause in further rate increases early next year, while a December hike of only 25 basis points would make another increase in the first quarter of next year "more likely."
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