Standard Charter expects Fed to hold rates amid inflation uncertainty

Investing.com -- Standard Charter said it expects the Federal Open Market Committee to keep policy rates unchanged on September 16, stating that a rate increase would be the wrong choice given current economic conditions.

The bank said core inflation is likely overestimated due to tariffs having an upward effect on core PCE inflation. The Commerce Department's comprehensive GDP revisions are expected to lower recent inflation estimates slightly, according to the bank's analysis.

Standard Charter said the Fed should wait until uncertainty from tariffs and data revisions clears before deciding whether a rate increase is necessary. The bank warned that reversing a premature hike would damage credibility.

Fed funds futures are pricing in an 88% probability of a 25 basis point hike and now price 74 basis points of increases by March. The market has priced in 35 basis points of additional hikes following Fed Chair Warsh's Jackson Hole comment about needing confidence that underlying inflation is moving toward the Fed's objective.

Standard Charter said an on-hold decision could hurt the long end of the U.S. Treasury curve and the dollar. The bank said such a move could reignite doubts about Chair Warsh's inflation-fighting stance that emerged after the July 29 FOMC meeting.

The bank said if the Fed raises rates as markets expect, it could boost Warsh's credibility and stabilize long-end yields and the dollar. More than three 25 basis point hikes are already priced in over the next 12 months.

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