• BNP Paribas forecasts three consecutive 25-basis-point rate hikes by the Federal Reserve beginning in December.
  • The prediction is based on persistent inflation and strong labor market data.
  • This marks a shift from earlier market expectations of a more gradual tightening path.

BNP Paribas Sees Aggressive Fed Tightening

BNP Paribas SA has issued a bold call for the Federal Reserve to deliver three interest-rate increases starting in December, according to a research note seen by Bloomberg. The French bank's economists now expect the Fed to raise rates by 25 basis points at each of its next three meetings, pushing the federal funds rate to a range of 4.75% to 5% by March.

"The data continues to point to an economy that is not cooling fast enough," the note said, citing recent inflation prints and jobless claims that remain near historic lows. "We think the Fed will need to act more aggressively to bring inflation back to target."

The forecast represents a more hawkish stance than many of BNP Paribas's peers. Markets are currently pricing in a roughly 40% chance of a December hike, with expectations for a pause early next year.

Economic Data Drives Outlook

The call comes amid a flurry of economic releases that have surprised to the upside. Core inflation, as measured by the personal consumption expenditures price index, rose 0.3% in August, above estimates. Meanwhile, nonfarm payrolls increased by 336,000 in September, nearly double the consensus forecast.

"You have to respect what the data is telling you," said a senior economist at a rival bank who asked not to be named discussing private forecasts. "If the economy doesn't slow, the Fed has no choice but to keep hiking."

BNP Paribas's view also reflects concerns that fiscal stimulus, including the recent surge in infrastructure spending, could add to demand pressures. The bank's economists noted that the latest GDPNow tracking from the Atlanta Fed points to third-quarter growth above 5%.

Implications for Markets

If realized, three consecutive hikes would rattle bond markets already grappling with rising yields. The 10-year Treasury yield has surged to 4.8%, its highest level since 2007. Stocks have also come under pressure, with the S&P 500 falling 5% in October.

"A more aggressive Fed would be a headwind for risk assets," said a portfolio manager at a New York-based hedge fund. "But it's a scenario we have to prepare for."

BNP Paribas's call aligns with the "higher for longer" narrative that Fed Chair Jerome Powell has emphasized. Powell last week said the central bank is "proceeding carefully" but didn't rule out further tightening.

A spokesperson for the Federal Reserve declined to comment on the bank's forecast. BNP Paribas did not respond to a request for comment.

(Updates with market reaction in sixth paragraph.)