The FOMC may complete two rate hikes before the end of the first quarter of next year.
With the latest inflation report coming in above expectations, the market is rapidly reassessing the Federal Reserve's policy path.
On the other hand, the risk of the Fed "overdoing it" is increasingly becoming a serious threat to the stock market in 2027.
Institutions are densely raising their forecasts.
Bank of America, Citibank, and Standard Chartered Bank have all warned in their latest research reports that comments from Fed Governor Waller have opened the door to a 50 basis point rate hike in December.
"The case for a 50 basis point hike in December is stronger than we expected, but not yet certain," said Steve Englander, an economist at Standard Chartered Bank.
Earlier this week, Fed Governor Christopher Waller suggested a 25 basis point rate hike next month, with a larger increase if price pressures accelerate.
After the stronger-than-expected October CPI, the yield on the US 2-year Treasury note, which is closely linked to policy expectations, rose 18 basis points on Tuesday, marking the most severe selloff in US Treasuries since April 2025.
The endpoint of this tightening cycle may also be pushed further up.
Federal funds rate pricing shows that investors currently expect the Fed to raise rates by at least another 50 basis points in the coming months.
This would reverse the FOMC's 75 basis point "insurance cuts" in 2025, which, based on current trends, may not be enough.
The Fed raised its benchmark rate to a range of 3.75%-4.00% in September this year, the first rate hike in three years.
Deutsche Bank, in a research report sent to Yicai, expects a 25 basis point hike in December, followed by another 25 basis point hike in January, with the risk of further tightening rising.
Ulrike Hoffmann-Burchardi, Chief Investment Officer for the Americas at UBS, believes the base case remains for the Fed to hike rates by 25 basis points each in December and March of next year.
The latest data changes further support the judgment that rates will remain high, while raising the risk of tighter-than-expected tightening and a faster pace of rate hikes.
David Mericle, Chief US Economist at Goldman Sachs, said in a memo on Tuesday that the Fed will hike rates in December this year and March next year, as inflation is expected to ease by year-end before price pressures re-emerge early next year, pushing inflation higher.
He expects the further tightening in March may be outlined in the Fed's dot plot next month, its interest rate projection chart.
The brokerage expects rate cuts to begin in December 2027, three months later than previously forecast, followed by further cuts in March, June, and September 2028.
This would bring the terminal federal funds rate from the current 3.75%-4% back down to 3.25%-3.5%.
Will the Fed go too far?
Since Fed rate hikes typically raise borrowing costs, excessive tightening is seen as a threat to stock market valuations.
At the same time, the AI boom itself may be fueling inflation, making financing costs for the sector more expensive and dampening the potential for further expansion.
Neil Dutta, Head of Economic Research at Renaissance Macro Research, said in a report: "While doubts about the durability of the AI trade remain at the center of investor attention, the risk of the Fed 'overdoing it' in its efforts to extinguish inflation is increasingly becoming a serious threat to the stock market in 2027."
"I do think over-tightening is a big risk," Dutta wrote. "You are now in a range where the unemployment rate is falling, the labor market is tightening, and inflation is increasingly deviating from the Fed's target."
The October inflation data released on Tuesday suggests that it will be difficult to bring inflation back to the Fed's 2% target in the short term as energy costs pass through downstream.
"In short, the Fed remains too optimistic about inflation, and the market is too complacent about the amount of policy tightening needed," Dutta wrote in the report.
Fed Vice Chair for Supervision Michelle Bowman warned of this danger in her latest remarks this week.
AI-related debt will exceed $800 billion this year, and the companies fueling this boom are becoming increasingly intertwined through loans, investments, and financial guarantees.
It is worth noting that one concern behind the recent market turmoil is that if the massive bets on artificial intelligence do not pay off, the losses may not be confined to the AI industry and could spill over to consumers and businesses beyond Silicon Valley.
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