Morgan Stanley highlights incoming data; Natixis views December hike as highly probable
Principal anticipates early-next-year hike, while ING expects a prolonged pause followed by late-next-year cuts
Following the U.S. Federal Reserve's decision to freeze benchmark interest rates in October, major global investment banks and asset managers are increasingly leaning toward a further rate hike in December. Persistent inflationary pressures have led financial institutions to conclude that the latest decision should not be interpreted as the end of the tightening cycle. However, forecasts remain divided over whether the central bank will continue raising rates next year or maintain rates for an extended period before pivoting to cuts.
At the Federal Open Market Committee (FOMC) meeting on the 28th (local time), the Fed maintained the target range for the federal funds rate at 3.75% to 4.00%. The pause follows a 25-basis-point hike in September. Ten committee members voted in favor of the freeze, while two dissented in favor of an additional rate increase.
Economists at Morgan Stanley interpreted the post-meeting statement as leaving the door open for further tightening. They focused on the assessment that inflation remains elevated and the phrasing that future policy stances will be determined based on incoming data. The analysis suggests that the tightening cycle may not be over and that subsequent actions will depend on upcoming economic indicators.
Natixis views a December hike as highly probable, citing inflation and labor market conditions. Christopher Hodge, senior U.S. economist at Natixis, told Reuters that while inflation challenges persist, economic growth remains robust and the unemployment rate is stable. Regarding the current pause, he suggested the Fed likely judged that asset price volatility and instability in certain technology stocks following the September hike acted as an effective form of tightening.
U.S.-based Principal Asset Management assessed that the decision not to rush into an immediate hike was appropriate. Seema Shah, chief global strategist, noted that while AI investments are booming, the broader economy is not uniformly strong, and high geopolitical uncertainty provides a valid reason to await additional data.
At the same time, Shah projected another rate hike in early 2027 following December. She reasoned that the two dissenting votes calling for a hike reflect a hawkish undercurrent within the Fed, indicating that the necessity for further tightening remains intact despite supporting the current pause.
Goldman Sachs Asset Management left open the possibility of continued tightening next year depending on inflation trends. Kay Haigh, global head and chief investment officer (CIO) of fixed income and liquidity solutions, told Reuters that he expects the Fed to resume rate hikes in December. He noted that a resurgence in energy prices or a continuation of strong economic data could necessitate further tightening next year.
Dutch financial group ING outlined a path starting with a December hike, followed by a prolonged pause and an eventual transition to rate cuts. In a post-meeting report, the firm projected that the target range would reach 4.00% to 4.25% following a 25-basis-point increase in December, where it would remain for a considerable period. The next rate adjustment is projected for December 2027, at which point a 25-basis-point cut is expected.
ING’s forecast is predicated on an improvement in energy supply conditions. The firm argued that if agreements are reached after the U.S. midterm elections to improve energy flows from the Persian Gulf, lowering shipping and insurance costs, inflationary pressures could ease. Combined with moderate wage growth and a slowing rate of increase in housing costs, U.S. inflation could moderate to 2% by the second half of next year, according to the analysis.
U.S.-based Northlight Asset Management also assigned a high probability to a December rate hike, though its outlook for next year factored in the risk of an economic slowdown. Chris Zaccarelli, CIO, assessed that the Fed has left the door open for a rate hike at its next meeting, but cautioned that higher interest rates could impact AI investments and pose headwinds for the economy.
Zaccarelli analyzed that if growth slows or a recession materializes over the next 12 months, interest rates could decline by the end of next year. Conversely, he added that if the economy maintains its robust momentum, the Fed could raise rates more than the two hikes currently priced in by the market.
