U.S. Federal Reserve likely to adopt one additional rate hike in December, says Barclays Research

The Federal Open Market Committee (FOMC) is expected to keep the target range for the federal funds rate unchanged at 1.0-1.25 percent at its July meeting and signal that balance sheet normalization is likely to begin in September.

The committee is expected to upgrade its assessment of labor markets while revealing some unease about inflation. Further, the statement is likely to say inflation is running “below 2 percent” – dropping the qualifier “somewhat” – and say explicitly that inflation is, in part, held down by transitory factors. At more than 50bp below target, it is difficult to say core inflation is only “somewhat below” 2 percent, Barclays Research reported.

The Fed has consistently made more progress on its balance sheet discussions during meetings this year than we expected; we see some risk they will announce runoff this week. On interest rate policy, persistent softness in inflation could cause the Fed to deliver rate hikes later, or slower, than currently anticipated.

"It will take time for weak incoming data on inflation to alter the Fed’s policy plans (if it ever does). We continue to project one additional rate hike this year in December," the report said.

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