The Federal Reserve is likely to deliver another super-sized interest rate hike in September, but it could be the last of that magnitude this year as growth starts to slow, according to JPMorgan Chase strategists.
In an analyst note on Monday, JPMorgan strategists led by Mislav Matejka said they expect the trade-off between growth and monetary policy to improve in the coming months as the Fed pivots toward smaller rate hikes.
"We expect another outsized Fed hike in September, but post that we would look for the Fed not to surprise the markets on the hawkish side again," they wrote.
Officials approved two back-to-back 75 basis point interest rate hikes in June and July – triple the usual size – and hinted that another increase of that magnitude is on the table in September, depending on the economic data. The minutes show that officials expect to approve a smaller 50 point increase in September, although they acknowledged the pace depends on the data.
Minutes released last week from the Fed's July meeting show that officials are likely to remain on a hawkish course, despite hopes from markets in recent weeks that policymakers could slow the pace of rate hikes.
"Participants agreed that there was little evidence to date that inflation pressures were subsiding," the minutes said. "They judged that inflation would respond to monetary policy tightening and the associated moderation in economic activity with a delay and could remain uncomfortably high for some time."
While the rapid pace of price increases eased slightly in July with the monthly increase flat at 0%, the consumer price index still climbed 8.5% from the previous year – hovering near a painful, four-decade high, the Labor Department reported last week. Markets rallied on the lighter-than-expected report, with investors hoping the Fed could take its foot off the gas in the coming months.
Stronger-than-expected data, including solid retail sales reported last week and a blowout July jobs report, could make the case for another mega-sized rate hike next month.
Traders are already pricing in a 56% chance of another three-quarter percentage point increase in the fall, according to the CME Group's FedWatch tool, which tracks trading. Another 44%, however, think the Fed will go with a half-point hike instead.
Chairman Jerome Powell is expected to provide some clues into the Fed's thinking on the economy and future rate hikes when he speaks at the annual Jackson Hole Economic Symposium at 10 a.m. ET on Friday.
Most experts think Powell will reiterate the central bank's commitment to bringing inflation under control.