BMO and TD economists say US interest rates could rise again by year-end
The smart money is on a rate freeze when the Fed makes its announcement Wednesday after its two-day policy meeting.
But rate hikes south of the border cannot be ruled out in the near-to-medium term according to leading Canadian economists.
At BMO Economics, deputy chief economist Michael Gregory, CFA, says the Fed will hold steady for the second consecutive meeting and there may be a prolonged pause ahead. However, with data still pointing to resilience in the U.S. economy with consumers still spending and inflation yet to be controlled: “it’s still premature to rule out another rate hike on December 13 or at the end of January.”
While the Fed’s chair Jerome Powell has been anticipating a slowdown for the world’s number one economy (to an estimated 1.8%), real GDP data for Q3 ran at 5.9%, its strongest since mid-2021 while the ‘supercore’ PCE price index, a key metric in underlying inflation, is running at a sticky 4%.
“For the record, we’re expecting the economic indicators to weaken meaningfully in the month or two ahead, sufficient to forestall further rate rises,” wrote Gregory in his latest analysis, citing reduced excess savings, tightening credit conditions, higher bond yields, student loan repayments, and autoworker strikes as contributing factors.
Rising oil prices and another cliff edge that could mean a government shutdown next month are also considerations.
That said, Gregory admits that the BMO Economics team’s expectations could be off, leading to the Fed potentially hiking beyond its current 5.25-5.5% target range.
TD’s view
Meanwhile, TD Economics director Thomas Feltmate highlights that the markets are fully priced for a hold steady this week and only a 20% chance of a rise in December, although a more hawkish tone from the Fed could upend that.
But he also notes that the U.S Employment Cost Index due next week, and October’s employment data this Friday, could make all the difference.
“Unless these reports show a definitive sign that the labor market is cooling, which looks unlikely given the recent strength in higher frequency indictors including jobless claims and Indeed job posting data, another rate hike come December seems inevitable,” he opined.
