Goldman Sachs raised interest rate hike expectations after Waller released the hawk: or two more December rate hikes of 25 basis points

The Zhitong Finance App learned that after Federal Reserve Governor Christopher Waller made hawkish remarks at the Turkish Central Bank Forum in Istanbul, Goldman Sachs chief economist Jane Hazius said that the Federal Reserve may choose to raise interest rates two more times rather than just once in December.

Hazius said in a report that two more interest rate hikes might be more appropriate; the probability of raising interest rates only once in December has declined. The analyst said that Waller's speech marked a shift in his position from previously emphasizing the three-month annualized rate of core PCE inflation to hawkish, but Goldman Sachs still expects the Federal Reserve to raise interest rates by another 25 basis points in December.

What did Waller say?

Waller's remarks on Thursday suggested that further interest rate hikes may be necessary to curb rising inflation and bring it back to the Fed's 2% target, adding that the pace of rate hikes is “flexible.”

“If economic data continues to meet expectations, I expect further interest rate hikes to support a more timely return of inflation to our 2% target,” Waller said in a prepared speech.

“However, there is some flexibility as to when these rate hikes will be implemented. Interest rate hikes do not have to take place in consecutive meetings, but they should be in place within an acceptable period of time.”

The remarks were made shortly after the minutes of the Federal Open Market Committee (FOMC) meeting of the Federal Reserve were published. The minutes show that 19 Federal Reserve officials supported the September rate hike.

In September, the Federal Reserve raised the benchmark interest rate by 25 basis points to the target range of 3.75%-4%, the first rate hike in about three years. The bitmap forecast shows that most Federal Reserve officials expect to raise interest rates by another 25 basis points before the end of the year.

According to CME's FedWatch tool, the probability of raising interest rates by 25 basis points in October is 17.7%, while the probability of increasing interest rates by up to 50 basis points in December is 83.7%.

Multiple macro-catalysts point to an imminent rate hike

Waller also stressed that although the war in Iran had an impact on energy prices and debt expansion driven by the boom in artificial intelligence construction intensified new concerns about inflationary pressure, the reasons for raising interest rates have become clear as the economy strengthens.

Waller said, “There is evidence that economic activity is strengthening in the second half of this year, and I'm not really worried that tightening monetary policy will cause a destructive economic slowdown. But I'm worried that the recent acceleration in inflation... will cause consumers, investors, and pricing companies to raise their expectations for future inflation.”

He pointed out that policymakers will release signals of interest rate trends, adding: “This signal helps anchor the short-term interest rate path while providing flexibility to adjust interest rate increases based on newly released data.”