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The US Federal Reserve is unlikely to embark on an aggressive tightening cycle, with only one additional rate hike projected, even as energy prices remain the key risk to the inflation outlook and potential new tariffs could renew price pressures, according to an Axis Bank report.
The US Federal Open Market Committee (FOMC) unanimously raised policy rates by 25 basis points, citing a timelier return of inflation to its target. Notably, it was the first increase since 2023, as policymakers moved to address persistent inflationary pressures. Axis Bank noted that while several inflation measures, including the closely watched Personal Consumption Expenditures (PCE) index, have remained above 2 per cent since 2020 and headline inflation has risen recently, the Feds language suggests it is focusing on underlying inflation trends, including core, median and trimmed measures, which continue to move towards the target. Fed does not appear to be signaling an aggressive tightening cycle, with only one additional hike projected and energy prices remaining the key risk to the outlook, it said, noting that the gap with market pricing delays, but does not eliminate, the debate over the Feds credibility. According to Fed Chair Kevin Warsh, the decision reflected a combination of a persistently strong labour market, limited signs of cooling inflation and a worsening geopolitical environment since the July FOMC meeting. The Feds latest economic projections also revised both growth and inflation estimates higher. While financial conditions have tightened since March 2026, they remain supportive of growth. ...a hike also helped reinforce the Feds institutional credibility, especially given the chairs appointment amidst the Presidents opposition to higher rates... the lender said in the report. According to Axis Bank, the rate hike and the Feds subsequent commentary did not point to an aggressive tightening cycle, with policymakers continuing to expect productivity gains to ease price pressures over the longer term. The lender estimates that the Fed could skip an October hike and deliver potentially just one more increase by March 2027, compared with market expectations of 75 basis points of additional tightening. Additionally, it identified energy prices, particularly amid the West Asia conflict, as a key risk to inflation, while warning that fresh tariffs could renew price pressures as the impact of earlier tariffs faded. The impact of past tariffs is now fading, but that may reverse if more tariffs (currently threatened) are imposed, it said. (ANI)
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