Wall Street thinks the Fed made a ‘mistake’ — and now more hikes are coming
Wall Street analysts have rapidly adjusted their forecasts after the third straight month of bad inflation news.
The affordability crunch featured as a core issue steering voters in the midterm elections. And those frustrations were echoed in the latest inflation data, showing price increases in food, rent, medical care, and electronics.
As Bank of America analysts put it in a note on Tuesday, “goods prices are becoming a problem (again),” and the recent inflation firmness is spreading to more things that Americans both need and want to buy.
Wall Street has already figured that rising costs have all but secured another rate hike in December. But the fresh inflation numbers were so discouraging that analysts are changing their projections or contemplating more and bigger rate hikes.
Already, Fed governor Christopher Waller has put a 50 basis point “jumbo” hike on the table for December, based on that hot October data.
The BofA analysts, like JPMorgan, are also questioning the Fed’s decision making, describing central bankers as trapping themselves in a “coulda, woulda, shoulda” situation.
“We stick with our call for a 25-basis point hike for now. But the Fed seems to be falling behind the curve on inflation, and the October hold is looking like a policy mistake. We see a rising risk that the Fed will have to hike again in January (rather than March),” wrote the Bank of America analysts.
Other observers see additional hikes next year.
David Mericle of Goldman Sachs forecasts that the Fed will raise rates for a third time In March. Mericle predicts that inflation will be meaningfully lower by the end of 2027 as the effects of tariffs, the energy shock, and AI pricing pressures weaken. But to get on that path, central bankers will likely have to adopt a more hawkish stance.
The latest inflation report, he said, included upside surprises across several categories that can’t be fully explained by the energy shock of the war in Iran.
As Federal Reserve economists have recently found, the post-pandemic economy appears to hold on to inflationary pressures for longer. And it has become more sensitive to oil shocks, more easily passing on price increases from the energy sector to the rest of the economy.
That’s another way of saying it’s harder than ever to be a central banker, or an American consumer. Especially, as recent Wall Street notes have argued, affordability is likely to get worse before it gets better.
Follow Hamza Shaban on X@hshaban.
