The Federal Reserve will hike rates by 25 basis points three times this year, according to PGIM, which is well outside the consensus for rates to stay even or see one hike by year-end. Economic resilience in the U.S. economy, inflation risks and renewed strength in the labor market will push the central bank to make those moves, PGIM said, adding that America is now facing high inflation with upside risks, as the U.S. Core Personal Consumption Expenditures price index is “uncomfortably high” at 3.3%. The Fed is in focus ahead of its meeting this week, to be helmed by new Chairman Kevin Warsh . PGIM’s forecast lies well outside consensus. The market currently assigns about a 41% probability rates are unchanged at year-end, with a 42% chance of one quarter-point hike and 14% of a 50 basis point increase, according to CME FedWatch. The PGIM analysis does see the hikes as short-lived, also predicting that there will be three cuts next year, followed by one final rate cut in 2028 for a terminal rate of 3.375%. “U.S. outperformance is being driven by the AI buildout, the wealth effect on consumption, and fiscal stimulus,” PGIM said. Ongoing support to consumers is also buoyed by a higher-than-usual tax refunds and a still-low unemployment rate, it added. One of the most concerning factors for PGIM “is that leading indicators of the ‘pipeline pressure’ for consumer inflation, such as the producer price index, remain very firm,” it said. There will also be further upward pressure on U.S. Treasury yields as the Fed heads into the precautionary hiking cycle, PGIM said. It expects 10-year yields to rise to around 4.60% assuming three 25 basis point Fed hikes are eventually priced. “Higher Fed policy rates also involve a rise in the cost of credit, which could challenge corporate profitability and lead to some spread widening,” PGIM said.
