J.P. Morgan expects the Federal Reserve to deliver one more rate hike in December 2025, followed by no prolonged tightening cycle extending into 2026. According to reports from J.P. Morgan, Chief U.S. economist Michael Feroli attributes this forecast to supply-shock-driven inflation continuing to dominate economic conditions. The Federal Open Market Committee raised its target range to 3.75% to 4% on September 16, marking the Fed's first hike since 2023 with a 12-0 vote. The latest September dot plot showed that 16 of 18 officials submitting projections expect at least one more hike this year, with four expecting two more hikes, and the median year-end policy rate implying one additional 25-basis-point increase this year.
Core Personal Consumption Expenditures (PCE) inflation has exceeded 3% every month this year, according to the J.P. Morgan report. However, a fresh reading showed prices cooled more than expected, rising to 3.4% rather than the expected 3.7%. Feroli notes that inflation continues to appear supply-shock-driven, supporting the case for a limited hiking cycle. The Fed's preferred inflation gauge excludes food and energy components. Feroli believes there is room to pause at the October meeting, because after the September hike, the Fed needs time to observe the policy's impact on the economy.
The December hike call aligns with the median on the dot plot, a chart of each official's rate projection. As reported by J.P. Morgan, Feroli sees a credible case for skipping October, as September's hike needs time to filter through the economy. Traders have already reduced their October hike odds following New York Fed President John Williams' signal of no urgency. The CME Group FedWatch Tool shows markets price a 72.5% probability of another 25-basis-point hike on October 28, and a 94.5% probability of at least one more hike by December 9. Another J.P. Morgan assessment has turned the spotlight onto September payrolls, noting that initial and continuing jobless claims declined during the month, raising the risk that September employment data comes in stronger than expected, which could support continued market bets on an October hike.
Chair Kevin Warsh has ordered five task forces to review Fed policymaking, with findings due by year-end. According to J.P. Morgan, three reviews stand out: communications may scrap the dot plot, balance sheet could push for a smaller Fed portfolio, and productivity and jobs will study AI's disinflationary effects. Jay Barry, J.P. Morgan's head of global rates strategy, notes that balance sheet changes would require major modifications to bank rules and payments systems. Feroli acknowledged that if the labor market continues to tighten and wage growth reaccelerates, excessively strong economic growth could alter this assessment and prompt the Fed to act sooner, as the central bank may begin to worry about "too much good news" in the economy.
Crypto fund inflows reached $3.55 billion last week, marking the most in 2026, according to CoinShares. A second hike will test whether this demand continues in the current interest rate environment. The timing of these developments coincides with the Fed's ongoing monetary policy decisions and potential future rate adjustments.
