After Waller's hawkish comments, Goldman Sachs raises rate hike expectations: May raise rates two more times, with a 25 basis point increase in December

Zhitong Finance APP has learned that after Federal Reserve Governor Christopher Waller delivered a hawkish speech at the Central Bank Forum in Istanbul, Turkey, Goldman Sachs Chief Economist Jan Hatzius stated that the Federal Reserve may choose to raise rates two more times, rather than only once in December.

In a report, Hatzius said that it may be more appropriate to raise rates twice, and the probability of only one rate hike in December has decreased. The analyst noted that Waller’s speech signaled his stance has shifted from previously emphasizing the three-month annualized rate of core PCE inflation to a more hawkish position. However, Goldman Sachs still expects the Federal Reserve to raise rates by 25 basis points in December.

What did Waller say?

Waller’s remarks on Thursday suggested that it may be necessary to further raise interest rates in order to contain rising inflation and bring it back down to the Federal Reserve’s 2% target. He also added that there is “flexibility” in the pace of rate hikes.

In his prepared remarks, Waller stated: “If economic data continues to evolve as expected, I anticipate further rate hikes to support a timelier return of inflation to our 2% target.”

“But there is some flexibility regarding the timing of these rate hikes. Additional rate increases do not have to occur at consecutive meetings but should be implemented within an acceptable period.”

These comments were made shortly after the Federal Open Market Committee (FOMC) meeting minutes were released. The minutes show that 19 Federal Reserve officials supported a rate hike in September.

In September, the Federal Reserve raised the benchmark rate by 25 basis points to a target range of 3.75%-4%, the first rate hike in about three years. Dot plot forecasts indicate that most Federal Reserve officials expect another 25 basis point hike before the end of the year.

According to data from CME's FedWatch tool, the probability of a 25 basis point rate hike in October is 17.7%, while the probability of a cumulative hike of up to 50 basis points by December is 83.7%.

Multiple macro catalysts point to imminent rate hikes

Waller also stressed that although the Iran war has caused shocks in energy prices and the AI-driven debt expansion has sparked new concerns about inflationary pressures, with a strengthening economy, the reasons for rate hikes are now clear.

Waller said: “There is evidence that economic activity is picking up in the second half of this year. I am not particularly concerned that tightening monetary policy will trigger a damaging economic slowdown. But I do worry that the recent acceleration of inflation... will lead consumers, investors, and firms setting prices to raise their expectations for future inflation.”

He pointed out that policymakers will send signals about the direction of interest rates, adding: “These signals help anchor the short-term interest rate path, while also providing flexibility to adjust rate hikes based on newly released data.”