Investors are expecting the Federal Reserve to raise interest rates at its September meeting, but one chief economist says a hike could be coming a lot sooner than that.
Neil Dutta, the chief economist at Renaissance Macro Research, thinks the market could be in for a surprise hike at the Fed next meeting, which kicks off on July 28.
“You must pick your spots against the consensus, and I feel like this might be one of those times,” Dutta wrote in a July 22 client note titled “Why not a hike now?”
Dutta said it’s “obvious” that a hike is coming at some point in the months ahead, given Fed chair Kevin Warsh’s hawkish comments in his first meeting last month, and given that the conditions supporting higher inflation remain in place. Those include a stable labor market, heavy AI spending, high oil prices, and tariffs. Services inflation is trending upward, he said, and rising oil prices will continue to leak into service costs.
Inflation was 3.5% in June, down from 4.2% in May, but remained well above the Fed’s target of 2%. On Thursday, Brent crude prices rose to over $100 a barrel for the first time since May as the US-Iran war intensified. This helped push 10-year yields up to 4.7% on Thursday as inflation fears ramped up again.
Investors see a hike by September. According to the CME FedWatch tool, markets are pricing in a 66% chance that the Fed stays put in July, but a 57% chance that the central bank hikes in September. By October, markets see a 79% chance that the Fed has hiked rates once or twice.
But Dutta pointed to a big reason a rate increase could be coming sooner than September: moving now would allow the Fed not to be backed into a corner in the months ahead.
“Most everyone else on the FOMC is on board for a hike in September. It might be much better to go now when you can and demonstrate some modicum of control over the policy decision than to go in September when you don’t have much choice,” Dutta wrote. “Put differently, going early gives Warsh some flexibility over future decisions.”
Warsh took over as Fed Chair in May after Jerome Powell’s second term at the helm of the central bank. So far, Warsh has emphasized the Fed’s commitment to fighting inflation.
Dutta’s outlook echoes that of Ed Yardeni, president of Yardeni Research, who said in May that a hike could be coming in July. He pointed to rising 2-year Treasury yields, which have climbed well above 4% and tend to mirror the path of the fed funds rate.
The fed funds rate currently sits in the 3.5%-3.75% range.
