Fed Could Raise Rates in October, Says Bhave

Aditya Bhave of Bank of America argues that the Federal Reserve may deliver a surprise interest rate hike in October, challenging the strong market consensus that officials will remain dovish. While recent "horrible" CPI data and broadening inflation suggest a need for tighter policy, the market has priced in a very low probability of a move, partly due to recent dovish forward guidance from Fed officials like Williams and Jefferson. This situation serves as a critical test for Kevin Warsh’s leadership and his stated desire to move away from forward guidance; failing to hike could signal that the Fed is muzzled by its own previous communications or is tacitly allowing inflation to remain above the 2% target. Although wage growth remains a stabilizing factor for now, rising survey-based inflation expectations and the risk of Core PCE hitting 3.4% by year-end underscore the potential for a hawkish shift if the labor market continues to tighten.