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WHAT SCENARIOS COULD FORCE THE FED TO HIKE RATES THIS YEAR?

Most analysts have largely ruled out interest-rate hikes from the Federal Reserve this year, citing the drag from higher oil prices linked to Middle East tensions and the boost to supply from strong capital spending tied to artificial intelligence.

However, Barclays analysts outline three scenarios that could still push policymakers toward a more hawkish stance - regardless of the influence of new chair Kevin Warsh.

First, a sustained rise in long-term U.S. inflation expectations away from the Fed’s 2% target could prompt action.

"In our view, scenarios in which the credibility of Fed's inflation anchor comes under threat would most likely coincide with long-lived and severe commodity price pressures from the Iran conflict," the analysts, led by Jonathan Miller, said in an investor note.

Second, policymakers may respond to persistent upside surprises in core personal consumption expenditures (PCE) - the Fed’s preferred inflation gauge - especially if inflation continues to reflect strong demand.

"If elevated inflation is viewed as a byproduct of persistently strong demand, policymakers will be inclined to tighten. By contrast, if inflation remains elevated even as demand is judged to be soft, the Fed’s two mandates cannot be simultaneously achieved with its policy tools," the analysts said.

Finally, signs that aggregate demand is running ahead of potential GDP growth could also tilt the Fed toward tightening.

"This scenario is less tied to the geopolitical backdrop and more to domestic momentum, particularly the AI capex cycle," the analysts said.

(Chibuike Oguh)

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