BNP Paribas strategist Chi Lo said a potential Federal Reserve rate hike in September is unlikely to mark the start of a new tightening cycle like the one seen in 2022 and 2023, even though markets are still expecting two more rate increases. In his view, such a move would more likely represent the beginning of a preventive round of hikes aimed at reversing last year’s three rate cuts and bringing inflation back to target. Chi Lo said additional hikes would not resolve external shocks such as war-related pressures and energy-price inflation, but they could ease financial market concerns about the Fed’s anti-inflation credibility. He added that the central bank cannot keep ignoring repeated shocks or shocks that fail to fade as expected. At the same time, he warned that further hikes used to slow activity in other parts of the economy in order to restrain inflation pressure could also raise the risk of pushing the economy into stagflation.
According to ChainCatcher, BNP Paribas strategist Chi Lo said that although markets expect two more Federal Reserve rate hikes, a September hike is unlikely to mark the start of a new tightening cycle comparable to that of 2022 to 2023.
Instead, Lo said, such a move would more likely signal the start of preventive rate hikes intended to reverse last year’s three rate cuts and bring inflation back to target.
He said further hikes would not solve 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 reappear repeatedly or fail to fade as expected.
He also said that if additional hikes are used to curb inflation pressure by slowing activity in other parts of the economy, they could carry the risk of pushing the economy into stagflation.
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