BNP Paribas Economist Predicts Three Fed Rate Hikes Amid Persistent Inflation

Isabelle Mateos y Lago, the group chief economist at BNP Paribas, has suggested that the U.S. economy may require three interest rate hikes from the Federal Reserve, potentially beginning next week. This forecast contrasts sharply with the prevailing view among economists who expect the Fed to maintain steady rates.

Currently, the federal funds rate stands between 3.50% and 3.75%, with the effective rate at 3.63%. The projection for multiple hikes indicates a more hawkish stance, which could significantly influence market expectations regarding tighter monetary policy.

Following Mateos y Lago's comments, prediction markets have shown an increased likelihood of a rate hike during the upcoming Federal Open Market Committee (FOMC) meeting scheduled for September 15-16. The odds for a rate hike have risen to 59.5%, up from 54% just a day prior. This shift suggests that market participants are adjusting their expectations in light of the potential for more aggressive actions from the Fed.

The implications of these rate hikes could be substantial for interest rate-sensitive assets and the U.S. dollar. As inflation dynamics and economic data continue to evolve, market activity related to Fed rate decisions is expected to increase.

What to Watch

• The FOMC meeting on September 15-16 will be crucial for any hints regarding future rate hikes.
• Comments from Fed Chair Jerome Powell and other officials will be closely monitored for insights into monetary policy direction.
• Upcoming inflation data, particularly the August CPI report, will be key in shaping market expectations.

New Insights from 'The Price of Money'

The book, authored by Jamie Rush, Tom Orlik, and Stephanie Flanders, argues that the natural rate of interest (r*) is expected to rise from approximately 1.7% in the mid-2010s to around 2.8% by the 2030s. This increase is attributed to demographic shifts and rising debt levels rather than direct monetary policy actions.

As baby boomers retire and begin to draw down their savings, the availability of capital is decreasing, leading to higher borrowing costs. The authors highlight that the competition for a shrinking pool of savings will drive up the price of money.

They also emphasize that while central banks can influence interest rates, they do not control the natural rate itself, which is determined by global savings and borrowing dynamics.

In terms of market implications, higher long-term borrowing costs will affect government refinancing and corporate borrowing, particularly impacting sectors like tech and real estate that are sensitive to changes in capital costs.

New Insights on Fed Rate Hikes and Treasury Yields

• The benchmark 10-year US Treasury yield is nearing the 5% mark, influenced by persistent inflation and rising debt levels.
• Market expectations are shifting, with a notable decrease in the probability of a "Pause–Pause–Pause" sequence in Fed decisions, now at 38%, down from 46% just a day prior.
• The upcoming Consumer Price Index (CPI) data release is critical, as it may not deter a Federal Reserve rate hike, even if it meets expectations.
• Statements from Federal Reserve officials, including Chairman Kevin Warsh and Governor Michelle Bowman, may provide further clarity on the Fed's policy direction.
• The September 15-16 FOMC meeting is anticipated to be pivotal in confirming or altering current market expectations regarding interest rates.