The storm of austerity has once again swept through! Societe Generale warns that the Federal Reserve will raise interest rates 3 times before March next year

The Zhitong Finance App notes that Société Générale expects the Federal Reserve to start raising interest rates in September because continued inflation and an improving labor market are driving policymakers towards a more austerity position.

According to a recent report by Jan Gruen, chief US economist at Société Générale, the bank currently predicts that the Federal Reserve will raise interest rates by 25 basis points each at the September and December meetings, followed by another rate hike in March 2027. However, the report points out that the last rate hike was relatively uncertain.

For investors, this adjusted outlook challenges market expectations for a more moderate austerity cycle, and may put upward pressure on US Treasury yields and the US dollar. Higher interest rates will also threaten the valuation of growth stocks and other interest-sensitive assets, and may boost bank profits and increase the appeal of cash and short-term bonds.

Société Générale's forecast will raise the median upper and lower limit of the federal funds rate target range to 4.125% by the end of 2026 and 4.375% in early 2027. According to the report, market pricing as of August 28 pointed to a lower peak, close to 4.2%.

This change comes after Federal Reserve Chairman Kevin Walsh delivered a speech at the central bank's annual seminar in Jackson Hole, Wyoming. Walsh did not provide clear guidance on the future path of interest rates, but he has focused quite a bit of energy on maintaining a high level over the past year.

Gruen said that Walsh's statement indicates that if inflation fails to slow down, the Federal Reserve Chairman will be open to further tightening the policy.

According to Société Générale's analysis of the cut-off average index, the annualized level of the underlying inflation rate has always been around 3%. Non-housing core services, which account for nearly 60% of the core personal consumption expenditure (PCE) price index, have also shown continued strong inflationary momentum since the pandemic.

The report points out that these pressures predate the 2025 tariff increase and the impact on oil prices caused by the war between Iran and the US. These two supply-side shocks then further boosted already high inflation and heightened concerns that repeated disruptions could ultimately unanchor consumers' future price expectations.

Meanwhile, the labor market has stabilized since the end of 2025 and signs of recovery, giving the Federal Reserve more room to focus on addressing inflation.

Despite this, there are still differences within Federal Reserve officials. A group of officials anticipates that core inflation will slow in the second half of this year, and therefore advocates keeping interest rates unchanged; while the more hawkish faction believes that inflation is structurally stubbornly above the Federal Reserve's 2% target, and a tighter monetary policy needs to be implemented.

Société Générale said that pro-active officials are likely still in the majority of voting members of the Federal Open Market Committee (FOMC). However, some members of the camp have indicated that they may support a rate hike if the monthly core PCE inflation rate fails to fall below 0.2%.

Société Générale expects core PCE inflation to be around 0.25% in August, similar to the growth rate in July. This would make the inflation rate for the second half of the year far higher than the monthly increase of about 0.17%, which is in line with the Federal Reserve's annual target.

The bank expects the Federal Reserve to act cautiously and spread interest rate hikes three times over a six-month period. This approach will allow policymakers to assess its impact on economic activity, and may make the September rate hike more acceptable to officials who prefer to keep interest rates unchanged.

The report added that Dallas Federal Reserve Chairman Lori Logan and St. Louis Federal Reserve Chairman Alberto Mussalem also prefer a moderate, gradual rate hike, which would actually reverse the three “preventive” interest rate cuts implemented in 2025.

The March 2027 rate hike remains the most uncertain part of Société Générale's forecast. Inflation may slow faster than expected, or early rate hikes may weaken the economy enough to persuade the Federal Reserve to stop raising interest rates after December.