The top forecaster who was first to predict the restart of the Federal Reserve's rate-hiking cycle has issued a new call: the Fed will keep rates unchanged in October, but if inflation pressure persists, it could deliver a larger 50-basis-point hike in December.
According to a Bloomberg report on Thursday, Prestige Economics President Jason Schenker said the Fed is unlikely to act at this month's meeting because the data currently available is not sufficient. He believes the Fed is more likely to give September's hike "some room to breathe," and after obtaining more data, decide in December whether to step up the pace.
Schenker's judgment carries some reference value for the market. As early as June this year, he predicted the Fed's September rate hike, making him the earliest among economists surveyed by Bloomberg to make that call, and his firm Prestige has long ranked near the top of Bloomberg's foreign-exchange forecast rankings.
No move in October: data insufficient to support action
Schenker believes the Fed lacks enough information at its October meeting to support another rate hike.
Fed Chair Kevin Warsh last month brought the central bank back into hiking mode — the first increase since 2023 — to counter persistently rising inflation pressure. Although consumer inflation data released in early October came in above economists' expectations, mainly driven by a sharp rise in fuel costs, briefly pushing futures-market bets on an October hike above 50%, those odds later retreated.
"I don't think they have enough data points to form the kind of conviction they might need," Schenker said. He noted that most of the data released on Wednesday was collected before the Fed's September hike, so it cannot yet reflect the actual effects of this round of policy adjustment.
Possible step-up in December: 50bp depends on inflation path
Schenker is looking to December, when he believes the Fed will have a more complete information base on which to make a decision.
Between the October and December meetings, Fed officials will receive two additional employment reports and one CPI reading, information that will directly influence their policy judgment. "It's just a wait of six weeks, but they will get more data," Schenker said. "If they find that a 25-basis-point hike has been completely ineffective, I think they may roll out 50 basis points."
Currently, swap markets have fully priced in a 25-basis-point hike in December. Schenker's view points to a more aggressive possibility: if inflation is not suppressed more effectively after the September hike, the Fed may "choose to hike 50 rather than 25 basis points, to bite into this tough problem with greater force."
Divergent paths: December's size will set next year's direction
Schenker also assessed the follow-up policy path under different scenarios, with the two outcomes pointing to very different trends next year.
If the Fed chooses a 50-basis-point hike in December, Schenker expects that larger move to prompt the central bank to pause further tightening early next year; conversely, if it hikes only 25 basis points in December, the likelihood of another hike in the first quarter of next year will rise significantly.
This path assessment has direct reference value for investors' asset allocation — the scale of the December decision will, to a large extent, determine the duration and terminal rate level of this rate-hiking cycle.
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