There’s still a good chance the Fed hikes rates again before cutting, market vet says

Federal Reserve Board Chairman Jerome Powell prepares to testify before a Senate Banking Housing and Urban Affairs Committee hearing on the The Semiannual Monetary Policy Report to the Congress; on Capitol Hill in Washington, U.S., March 1, 2018.

Yuri Gripas/Reuters

A rate hike could still be on the table in the first quarter, Veritas’ Gregory Branch told CNBC.
Markets have become too confident that the economy is slowing down.
Inflation is re-emerging due to the market’s expectation of a Fed pivot, he said.

Interest rates could still rise if the Federal Reserve is committed to slowing the labor market, the founder of Veritas Financial Group told CNBC on Thursday.

While inflation has cooled consistently since the second half of 2023, the Fed has signaled that it might not have done enough yet to declare mission accomplished. 

“What I think now is the problem is that the Fed, they have an issue,” Gregory Branch said. “So while the market has decided that everything is over, I continue to say, again, to great consternation, that I think it’s more likely that we see a hike than a cut in the first quarter.”

In debating the trajectory of interest rates, Branch has long held bearish forecasts, and diverged from last month’s market narrative that the Fed will soon pivot and start cutting. Bets surged that the central bank could start slashing rates as soon as March, given a surprising late-year slowdown in inflation.

Though Branch acknowledged that his projections missed the mark through 2023, he pointed out that markets have become too confident that the economy is cooling enough for the Fed to change course. 

“I remember throughout most of 2023, a lot of our colleagues and fellow prognosticators would often say to me, ‘the inflation story is a 2022 story, that’s over.’ Well, it is re-emerging,” Branch said. “And it’s re-emerging because the market has decided that the Fed is done.”

In his view, investors are ignoring negative catalysts that run counter to rate-cutting hopes, such as record low jobless claims, and continued hawkish rhetoric from Fed officials. 

“We have to wonder, how can the Fed get to that 4.1% unemployment that they embedded in those dot plots?” he said.

The latest labor market figures appear to support Branch’s argument. The December jobs report released Friday showed 216,000 nonfarm payrolls were added through the month, topping expectations of 170,000. The unemployment rate remained at 3.7%.

Yet, others see things differently, with UBS’s chief economist saying last week that a mid-year slowdown will accelerate disinflation, pressing the Fed to cut rates to below 3% this year.