The Fed isn’t expected to raise rates this week, nor are the ECB or the BOJ. However, that does not mean the rate-hiking cycle is over. The market is pricing in a 25-basis-point Fed rate hike in December, which would raise the target range to 4%–4.25% from 3.75%–4%. However, Chair Warsh is unlikely to provide much guidance on the timing or extent of future rate hikes, leaving the market to draw its own conclusions from incoming economic data.
Overall, we are in a tightening cycle. The question is whether the market expects the Fed to raise its policy rate back to the restrictive levels last seen in 2023. At least for now, the answer appears to be no, suggesting that the market views this tightening cycle as more of a recalibration than a return to aggressively restrictive monetary policy. The same holds true for the ECB, which is expected to raise rates as many as three more times by September 2027.
How much further central banks raise rates will depend on inflation, and this week’s PCE report is unlikely to offer much relief. However, the report comes on Thursday morning, after Wednesday’s Fed meeting. Headline PCE is expected to rise 0.5% m/m, while core PCE is forecast to rise 0.3% m/m. Not exactly cool readings.
Oil prices offer little reason to believe inflation will cool anytime soon, and they could worsen. WTI remains in an uptrend and is approaching a key resistance level at $105. A breakout above that level could send oil prices sharply higher, potentially back above $110 and perhaps even $115.
Meanwhile, the oil volatility index (OVX) appears to be breaking out of its own consolidation pattern. Rising implied volatility alongside rising oil prices is not a good combination, suggesting not only higher oil prices to come, but also higher inflation and potentially higher interest rates.
If oil prices break out alongside rising implied volatility, the market will likely need to price in a more aggressive path of central bank rate hikes, pushing interest rate expectations higher.
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