Two More Fed Rate Hikes Likely After Governor Waller’s Hawkish Remarks: Goldman Sachs

According to The Fly, Hatzius said in a note that two additional rate hikes would likely be more appropriate, and that the probability of a singular one in December has decreased.

• The analyst said U.S. Fed Governor Christopher Waller’s latest speech in Turkey signals a hawkish shift, though Goldman Sachs still expects one additional 25 bps rate hike in December. 
• Waller’s comments on Thursday suggested additional rate hikes would likely be necessary to curb rising inflation and bring it to the Fed's 2% target.
• The governor added that there is some flexibility on when those hikes will occur and that they do not need to come at consecutive meetings.

Goldman Sachs chief economist Jan Hatzius said the Federal Reserve could opt for two rate hikes instead of one in December after Fed Governor Christopher Waller’s hawkish remarks at a Central Bank of Turkey forum in Istanbul.

According to The Fly, Hatzius said in a note that two additional rate hikes would likely be more appropriate and that the odds of a single hike in December have decreased. 

The analyst said Waller’s speech signals a hawkish shift from his earlier emphasis on the three-month annualized rate of core PCE inflation, though Goldman Sachs still expects one additional 25 bps rate hike in December. 

What Did Waller Say?

Waller’s comments on Thursday indicated that additional rate hikes would probably be necessary to curb rising inflation and bring it to the Fed's 2% target, adding that there was "flexibility" about ‌the pace of increases. 

"If the economic data continue to come in as expected, I anticipate additional hikes to support a timelier return of inflation to our 2% goal," Waller said in prepared remarks.

"But there ​is some flexibility about when those hikes will occur. The hikes do not need to come at consecutive meetings, but they should ​be in place in an acceptable period of time."

The remarks come shortly after the release of the Fed’s Federal Open Market Committee (FOMC) meeting minutes, which showed that 19 Fed officials backed the September interest rate hike.

In September, the Fed hiked benchmark interest rates by 25 basis points to a target range of 3.75% to 4%, its first increase in about three years. 

Projections indicated that most U.S. central bankers forecast another quarter-point hike by year-end.

According to data from the CME FedWatch tool, the probability of a 25 bps rate hike in October is 17.7%, while the probability of a hike of up to 50 bps in December is 83.7%. 

Multiple Macro Catalysts Indicate Rate Hikes Are Coming

Waller also highlighted that the case for higher rates had become clear as the economy was strengthening, despite an energy price shock from the Iran war, ⁠and fresh worries about the AI buildout-driven debt adding to inflation pressures. 

"With evidence that economic activity is strengthening in the second half of this year, I am not greatly concerned that tighter monetary policy threatens a damaging slowdown in the economy," Waller said. "But I am concerned that the recent acceleration in inflation... will lead consumers, investors, and price-setting businesses to revise up their expectations for future inflation."

He noted that policymakers signal where rates are likely headed, adding, "This signaling helps ​to anchor the path of short-term interest rates but provides flexibility in adjusting rate hikes based on incoming data."

How Are Markets Reacting?

At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was up 0.14% overnight amid ‘bullish’ sentiment. 

The SPDR Dow Jones Industrial Average ETF Trust (DIA) was up 0.20%, also amid ‘bullish’ sentiment, while the Invesco QQQ Trust (QQQ) had gained 0.08% amid ‘extremely bullish’ sentiment. 

The iShares 20+ Year Treasury Bond ETF (TLT) was down 0.03% amid ‘bullish’ sentiment. 

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