BNP Paribas has revised its stance on US monetary policy, forecasting three interest rate increases from the Federal Reserve starting in December. The bank points to unexpectedly strong employment figures and growing inflationary pressures, partly attributed to the US-Iran tensions, as key drivers for this shift.
The financial institution now expects the Fed to undo its 2025 rate cuts through consecutive hikes at upcoming Federal Open Market Committee meetings. According to BNP Paribas’ Markets 360 analysis, policymakers may need to withdraw some monetary accommodation as inflation risks escalate while the labor market remains robust. The bank also predicts the unemployment rate could drop to 4% by year-end, giving the central bank more leeway to address price stability.
Recent job data bolsters this outlook, with nonfarm payrolls surging by 172,000 in the last month, far exceeding the anticipated 85,000. The unemployment rate held steady at 4.3%, underscoring economic resilience.
Market sentiment is aligning with a more hawkish Fed. Polymarket data shows a 52% probability of a rate hike before year-end, a level not seen before the latest jobs report. Similarly, the CME FedWatch tool indicates a 42.7% chance of higher rates by December, with traders largely expecting rates to remain unchanged through most of the year, assigning slim odds to further cuts.
Despite these signals, Federal Reserve officials remain divided. Mary Daly has urged patience, emphasizing that price stability must not come at the cost of economic damage. She suggests waiting for more data before making significant policy moves. In contrast, former New York Fed President Bill Dudley warns that the central bank risks losing credibility if inflation lingers above its 2% target. He argues that inflation has exceeded the goal for over five years, and the neutral interest rate may be higher than assumed, implying monetary policy is less restrictive than it appears. Dudley cautions that prolonged inflation could entrench expectations in the 3% to 5% range, potentially requiring more aggressive action later to rein in prices.