• BNP Paribas expects the Federal Reserve to raise rates three times starting in December, challenging the central bank's credibility after last week's hold with dissents.
  • The forecast is based on persistent inflation and strong labor market data, which could push Treasury yields higher and pressure equities.
  • Market participants have already begun pricing in a December hike, reacting to recent data and Fed communications.

A Hawkish Bet

BNP Paribas is making a bold call: the Federal Reserve will embark on a tightening cycle starting in December, delivering three quarter-point hikes that would lift the policy rate by 75 basis points. The French bank argues that stickier inflation and a resilient jobs market will force the Fed to act, despite its recent decision to hold rates steady—a move that drew three dissenting votes.

"The Fed's credibility is on the line," said a BNP strategist, speaking on condition of anonymity. "With inflation running hot and employment solid, markets will keep questioning the Fed's commitment to price stability."

The bank's view stands in contrast to the Fed's own projections, which suggest a more gradual path. But BNP is not alone in its hawkish stance; traders have been increasingly pricing in a December move, with fed funds futures showing a probability of over 70% for a hike at the December meeting, according to recent data.

Yields on the Rise

If BNP's forecast materializes, Treasury yields are likely to climb further, particularly at the short end of the curve. The two-year yield, which is most sensitive to policy expectations, has already risen to 4.8%, up from 4.5% a month ago. The 10-year yield, meanwhile, hovers around 4.9%, near its highest level in months.

"The market is repricing for a more aggressive Fed," said a fixed-income strategist at a rival bank. "This is putting upward pressure on yields across the board, and we see that spilling over into risk assets."

Equities have felt the pinch, with the S&P 500 down 2% over the past week as investors digest the possibility of tighter policy. The tech-heavy Nasdaq has suffered even more, falling 3%.

Policy Implications

Should the Fed deliver three hikes, the impact would ripple through the economy. Higher borrowing costs would likely cool demand, potentially slowing growth. But BNP argues that the economy can withstand the tightening, given the strength of the labor market.

"The Fed needs to catch up with reality," the BNP strategist said. "Inflation is not transitory, and the jobs market is too strong to ignore. If they don't act, they risk losing control of the narrative."

The bank's call is not without risks. If inflation moderates or the economy weakens, the Fed could hold off. But for now, BNP is betting on a more hawkish path.

This article has been updated to reflect the latest market pricing.