The US Federal Reserve is increasingly likely to raise interest rates by 25 basis points next week following stronger-than-expected August employment and producer inflation data, although the move is unlikely to mark the start of a fresh tightening cycle, according to Standard Chartered.
Standard Chartered economist Rajat Bhattacharya said recent data have strengthened the case for what he described as a potential “credibility hike”, particularly after Federal Reserve Chair Kevin Warsh’s hawkish Jackson Hole remarks.
The US economy added 162,000 jobs in August, almost three times market expectations, while the unemployment rate remained steady at 4.1% despite an increase in labour force participation.
Bhattacharya said the unchanged unemployment rate suggests the US economy remains close to full employment, although the composition of job creation was relatively narrow, with around 60% of gains concentrated in leisure and hospitality and government.
Average hourly earnings growth also eased to a five-year low of 3.1% year-on-year.
At the same time, both headline and core producer inflation accelerated in August, strengthening expectations that the Fed could tighten policy again.
Standard Chartered said the remaining key test is the August consumer inflation report, with a monthly core inflation reading of 0.2% or higher likely to reinforce the case for a rate increase.
Bhattacharya said a Fed hike now appears the most probable outcome unless the inflation data are unexpectedly weak.
He argued that with the current federal funds rate at 3.75% and Warsh having characterised policy as not restrictive, failing to raise rates despite resilient employment and inflation data could raise questions about the central bank’s credibility.
Standard Chartered highlighted a residual risk that the Fed could hesitate because of political pressure from the Trump administration.
Should that occur, Bhattacharya warned that investors could question the central bank’s independence, potentially triggering a near-term sell-off in both equities and bonds.
The US 10-year Treasury yield has risen 19 basis points this week to 4.97%, its highest level in three years.
However, Standard Chartered sees limited room for a sustained further increase.
The yield is approaching the 5.02% peak recorded in 2023, while investor positioning is already extremely bearish, with commodity trading adviser short positions at record levels.
Bhattacharya said current yields are also approaching levels where authorities could become more active in using regulatory, liquidity-management or debt-supply tools to prevent disorderly market conditions.
Even if the Fed keeps rates unchanged and the 10-year yield briefly rises above 5.02%, Standard Chartered believes extreme bearish positioning should ultimately limit the upside.
The bank therefore views the recent increase in yields as an opportunity to extend bond portfolio maturities into the three-to-seven-year segment, with a preference for corporate bonds.
Longer-duration bonds remain more vulnerable to inflation expectations driven by oil prices and US fiscal concerns.
Standard Chartered expects higher oil prices to keep near-term inflation elevated but does not believe the pressure will persist indefinitely.
It expects inflation to ease next year as the impact of tariffs and higher energy prices fades.
This is one reason the bank does not expect an expected September rate increase to develop into a prolonged hiking cycle.
Standard Chartered has also added another 25-basis-point European Central Bank rate increase by year-end to its forecast after the ECB raised its deposit rate by 25 basis points to 2.5%.
The bank cited upgraded ECB growth and inflation projections, higher European gas prices and what it described as a distinctly hawkish tone from ECB President Christine Lagarde.
Despite the rise in bond yields and oil prices, Standard Chartered remains constructive on equities.
Bhattacharya said recent market weakness has been driven mainly by higher energy prices and rising yields rather than a deterioration in corporate fundamentals.
The bank would use volatility to add exposure to equities, particularly in the US and Asia excluding Japan, where it sees the corporate earnings outlook as resilient.
It is also adding semiconductor equities as an opportunistic tactical idea, using recent weakness in the sector to increase exposure.
Overall, Standard Chartered expects the Fed to raise rates next week but sees the move as a one-off response to persistent inflation and strong labour conditions rather than the beginning of a renewed tightening campaign.
