Top forecaster and president of Prestige Economics, Jason Schenker, who first predicted the current round of Federal Reserve interest rate hikes, has made a new assessment: no action in October, but if inflation remains stubborn, a direct increase of 50 basis points may be implemented in December. He warned that two paths will lead to completely different interest rate trajectories next year—if a 50 basis point increase is chosen, it will prompt the Fed to pause further tightening early next year; if only a 25 basis point increase is made, the likelihood of another rate hike in the first quarter of next year will significantly rise.

Written by: Zhao Ying, Wall Street Insight

The top forecaster who first predicted the restart of the Federal Reserve's current interest rate hike cycle has issued a new judgment: the Fed will maintain interest rates in October, but if inflationary pressures persist, a larger increase of 50 basis points may be implemented in December.

According to a report by Bloomberg on Thursday, Prestige Economics president Jason Schenker stated that it is unlikely the Fed will take action in this month's meeting due to insufficient data available for reference. He believes the Fed is more likely to give "some breathing room for the September rate hike" and decide in December whether to take stronger measures after obtaining more data.

Schenker's judgment holds some reference value for the market. He had predicted the Fed's September rate hike as early as June of this year, being one of the first among economists surveyed by Bloomberg to make such a prediction, and his institution, Prestige Economics, has consistently ranked high in Bloomberg's foreign exchange forecasting leaderboard.

Holding Steady in October: Insufficient Data to Support Action

Schenker believes the Fed lacks sufficient information to support another rate hike in the October meeting.

Fed Chairman Kevin Warsh brought the Fed back into a rate-hiking mode last month—marking the first rate hike since 2023—to respond to rising inflation pressures. Although consumer inflation data released in early October exceeded economists' expectations, largely driven by a sharp rise in fuel costs, causing futures markets to briefly bet on a greater than 50% chance of a rate hike in October, it subsequently fell back.

"I don't think they have enough data points to form the kind of assurance that might be needed," Schenker stated. He pointed out that most of the data released on Wednesday was gathered before the Fed's September rate hike, and therefore cannot yet reflect the actual effects of this round of policy adjustments.

Possible Increase in December: 50 Basis Points Depends on Inflation Trends

Schenker is looking towards December, believing that by then the Fed will have a more solid information foundation to make decisions.

Between the October and December meetings, Fed officials will receive two additional employment reports and one CPI data point, all of which will directly impact their policy judgment. "Just wait six weeks, but they will have more data," Schenker said, "If they find that a 25 basis point increase has no effect, I think they might go for a 50 basis point increase."

Currently, the swap market has fully absorbed the expectation of a 25 basis point rate hike in December. However, Schenker's assessment points to a more aggressive possibility: if inflation fails to be effectively restrained after September's rate hike, the Fed may "choose to increase by 50 rather than 25 basis points to tackle this tough issue more forcefully."

Divergence of Paths: December's Action Determines Next Year's Trajectory

Schenker also provided insights on the different policy paths under various scenarios, with two outcomes pointing to entirely different trends next year.

If the Fed chooses to raise rates by 50 basis points in December, Schenker expects that this larger action will prompt the Fed to pause further tightening early next year; conversely, if the Fed only increases by 25 basis points in December, the likelihood of another rate hike in the first quarter of next year will significantly increase.

This path assessment has direct reference significance for investors' asset allocation—the decisiveness of December's decision will largely determine the duration of this round of rate hike cycle and the final interest rate level.