Analyst Who First Predicted September Rate Hike: Fed to Hold Steady in October, May Hike 50 Basis Points in December

Top forecaster and president of Prestige Economics, Jason Schenker, who was among the first to predict the Federal Reserve's rate hike cycle, has made a new assessment: the Fed will hold rates steady in October, but if inflation remains stubborn, a larger hike of 50 basis points may be on the table in December. He warns that two paths will lead to vastly different interest rate trajectories next year—if the Fed opts for a 50 basis point hike, it will likely pause further tightening early next year; if it only raises by 25 basis points, the chances of another hike in the first quarter of next year will significantly increase.

Written by: Zhao Ying, Wall Street Insight

The top forecaster who first anticipated the restart of the Fed's rate hike cycle has issued a new judgment: the Fed will keep rates unchanged in October, but if inflation pressures persist, a larger hike of 50 basis points may be implemented in December.

According to a report by Bloomberg on Thursday, Prestige Economics president Jason Schenker stated that the Fed is unlikely to take action at this month's meeting due to insufficient data available for reference. He believes the Fed is more likely to leave some breathing room after the September hike, waiting for more data before deciding in December whether to increase the pace.

Schenker's judgment holds some reference value for the market. He predicted the Fed's September rate hike back in June, making him one of the earliest economists to do so in a Bloomberg survey, and his firm Prestige has consistently ranked high in Bloomberg's foreign exchange forecasting leaderboard.

October Hold: Insufficient Data to Support Action

Schenker believes that the Fed lacks sufficient information to support another rate hike at the October meeting.

Fed Chair Kevin Warsh brought the Fed back into a rate hike mode last month—marking the first hike since 2023—to address the ongoing rise in inflation pressures. Although the consumer inflation data released at the beginning of October exceeded economists' expectations, driven mainly by a significant rise in fuel costs, futures markets saw bets on a rate hike in October rise to over 50% before subsequently retreating.

"I don't think they have enough data points to form the kind of conviction that might be needed," Schenker stated. He pointed out that most of the data released on Wednesday was collected before the Fed's September rate hike, and thus does not yet reflect the actual effects of the current policy adjustment.

December May See Larger Hike: 50 Basis Points Depends on Inflation Trends

Schenker is looking ahead to December, believing that by then the Fed will have a more solid information base to make decisions.

Between the October and December meetings, Fed officials will receive two additional employment reports and one CPI data release, which will directly influence their policy judgments. "Just wait six weeks, but they will get more data," Schenker said. "If they find that a 25 basis point hike is ineffective, I think they might go for 50 basis points."

Currently, the swap market has fully priced in expectations for a 25 basis point hike in December. However, Schenker's judgment points to a more aggressive possibility: if inflation fails to be effectively suppressed after the September hike, the Fed may "choose to hike by 50 rather than 25 basis points to tackle this tough challenge more forcefully."

Diverging Paths: December's Action Determines Next Year's Direction

Schenker also assessed the subsequent policy paths under different scenarios, with two outcomes pointing to vastly different trends for next year.

If the Fed chooses to hike by 50 basis points in December, Schenker expects this significant action will prompt the Fed to pause further tightening early next year; conversely, if it only raises by 25 basis points, the likelihood of another hike in the first quarter of next year will significantly increase.

This path assessment holds direct reference value for investors' asset allocation—the strength of the December decision will largely determine the duration and endpoint interest rate level of this rate hike cycle.

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