J.P. Morgan expects the Federal Reserve to raise rates once more in December before pausing its hiking cycle, according to chief U.S. economist Michael Feroli. The forecast is rooted in the bank's view that current inflation pressures stem primarily from supply shocks rather than broad-based demand.
The Fed raised its target rate range to 3.75% to 4% in September with a unanimous 12-0 vote, marking its first hike since 2023. Core Personal Consumption Expenditures (PCE) inflation, the Fed's preferred measure, has remained above 3% each month this year, though a recent reading came in at 3.4%—below the expected 3.7%.
Rationale for December Move
Feroli cited two key reasons for expecting a December hike. First, the supply-shock diagnosis suggests inflation will not require a prolonged tightening campaign. Second, another increase would protect the Fed's credibility after Chair Kevin Warsh repeatedly warned against tolerating inflation.
J.P. Morgan's December call aligns with the median projection on the Fed's dot plot, which shows each official's rate forecast. Traders have already reduced their odds for an October hike following signals from New York Fed President John Williams indicating no urgency to move at the October 28 meeting.
Fed Review Process and Policy Uncertainty
Chair Warsh has ordered five task forces to examine Fed policymaking, with results due by year-end. Three reviews could carry particular weight: one on communications strategy, one on the Fed's balance sheet, and one focused on productivity and artificial intelligence.
The communications review may recommend scrapping the dot plot, though Feroli expressed uncertainty about this outcome and cautioned that eliminating it without a replacement could reduce transparency. A balance sheet review may recommend shrinking the Fed's portfolio, a change that would require substantial modifications to banking regulations. The productivity task force will examine AI's deflationary effects, though J.P. Morgan sees no near-term policy impact from that analysis.
Any major policy shift would require approval from the full Federal Open Market Committee, suggesting that significant changes could take time to implement. The Fed's next meetings are scheduled for October 28 and December 9.
