The tightening storm is sweeping through again! Socit Gnrale warns that the Federal Reserve will raise interest rates three times before March next year.

Notably, the French Industrial Bank expects the Federal Reserve to start raising interest rates in September, as persistent inflation and an improving labor market are driving policymakers toward a more tightening stance. According to the latest report from Jan Groen, the chief U.S. economist at the French Industrial Bank, the bank currently forecasts that the Federal Reserve will raise rates by 25 basis points at both the September and December meetings, followed by another increase in March 2027. However, the report indicates that there is considerable uncertainty regarding the final rate hike. For investors, this adjusted outlook challenges market expectations for a more moderate tightening cycle and could exert upward pressure on U.S. Treasury yields and the dollar. Rising rates will also threaten the valuations of growth stocks and other interest rate-sensitive assets while potentially boosting bank profits and increasing the appeal of cash and short-term bonds. The French Industrial Bank's prediction would raise the midpoint of the target range for the federal funds rate to 4.125% by the end of 2026 and reach 4.375% by early 2027. The report mentions that market pricing as of August 28 pointed to a lower peak, close to 4.2%. This change occurred after Federal Reserve Chairman Kevin Walsh spoke at the annual central bank symposium held in Jackson Hole, Wyoming. Walsh did not provide clear guidance on the future path of interest rates, but he devoted considerable attention to the high levels maintained over the past year. Groen stated that Walsh's remarks indicate an openness to further tightening if inflation fails to ease. According to the French Industrial Banks analysis of the trimmed mean indicator, the core inflation rate has been running close to 3% on an annualized basis. Core services excluding housing, which account for nearly 60% of the core Personal Consumption Expenditures (PCE) price index, have also shown persistent inflationary momentum since the pandemic. The report notes that these pressures precede tariff increases expected in 2025 and oil price shocks stemming from the war between Iran and the United States. These two supply-side shocks will further elevate inflation, which was already high, and intensify concerns that recurring disturbances could eventually unanchor consumer expectations for future prices. Meanwhile, signs of stabilization and recovery in the labor market since the end of 2025 provide the Federal Reserve with more leeway to focus on addressing inflation issues. Nevertheless, there are still divisions among Federal Reserve officials. One group of officials anticipates that core inflation will slow down in the second half of this year, advocating for keeping rates unchanged; while a more hawkish faction believes that inflation is structurally stubbornly above the Federal Reserve's 2% target and requires tighter monetary policy measures. The French Industrial Bank states that officials supporting a hold may still constitute a majority among voting members of the Federal Open Market Committee (FOMC). However, some members in this camp have indicated they might support a rate hike if the monthly core PCE inflation rate does not fall below 0.2%. The French Industrial Bank expects that the core PCE inflation rate for August will be around 0.25%, similar to the growth rate in July. This would result in the inflation rate for the second half of the year being significantly above the monthly increase of approximately 0.17% that aligns with the Federal Reserves annual target. The bank anticipates that the Federal Reserve will proceed cautiously, implementing three rate hikes over a six-month period. This approach would allow policymakers to assess its impact on economic activity, potentially making it easier for those inclined to maintain rates unchanged to accept a rate hike in September. The report adds that Dallas Fed President Lorie Logan and St. Louis Fed President Alberto Musalem also lean toward moderate, gradual rate increases, which would effectively unwind the three "preemptive" cuts implemented in 2025. In the French Industrial Bank's forecasts, the March 2027 rate hike remains the most uncertain part. The pace of inflation easing could be faster than expected, or early rate hikes might weaken the economy sufficiently to persuade the Federal Reserve to halt rate increases after December.