BNP Paribas strategist Chi Lo said the Federal Reserve is unlikely to use a September rate hike as the start of a fresh tightening cycle like the one seen in 2022 and 2023, even though markets are still pricing in two more hikes. In his view, such a move would look more like the start of a "preventive hike" phase aimed at reversing last year’s three rate cuts and bringing inflation back to target.
Lo said additional hikes would not solve external shocks such as war-related disruptions and energy-price inflation. What they could do, he said, is ease financial-market concerns about the Fed’s anti-inflation credibility. He added that the central bank cannot keep ignoring shocks that recur or fail to fade as expected.
At the same time, Lo warned that more tightening carries its own cost. If higher rates are used to suppress inflation pressure by slowing activity in other parts of the economy, that process could raise the risk of pushing the economy into stagflation.
BNP Paribas strategist Chi Lo said on Sept. 28 that, despite market expectations for two more Federal Reserve rate hikes, a September increase is unlikely to mark the start of a new tightening cycle on the scale of 2022 to 2023.
Instead, Lo said the move would more likely signal the start of a "preventive hike" approach designed to reverse last year’s three rate cuts and bring inflation back to target.
He said further hikes would not resolve external shocks such as war and energy-price inflation, but they could ease financial-market concerns over the Fed’s anti-inflation credibility. In his view, the Fed cannot keep turning a blind eye to shocks that recur or fail to fade as expected.
Lo also said additional hikes could carry the risk of pushing the economy into stagflation if inflation pressure is curbed by slowing activity in other parts of the economy.
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