BNP Paribas now sees three Fed hikes starting in December, warns inflation risk could force policymakers to tighten
BNP Paribas has shifted to a more hawkish stance, warning that rising inflation risks — which it links in part to the U.S.-Iran conflict — could prompt the Federal Reserve to hike rates three times beginning in December. In a Markets 360 briefing, the bank abandoned its prior view of stable policy and said the Fed may reverse the three rate cuts it had forecast for 2025 via consecutive increases at upcoming Federal Open Market Committee meetings.
Why BNP Paribas changed its call
- Stronger-than-expected U.S. labor market data and renewed inflation pressures underpin the bank’s view that some monetary stimulus will need to be removed.
- BNP Paribas projects the unemployment rate could fall to about 4.0% by year-end, a level that would give the Fed more scope to focus squarely on price stability.
The data that moved markets
- U.S. nonfarm payrolls rose by 172,000 last month — well above the 85,000 consensus — while the unemployment rate held at 4.3%. That resilience in jobs came after inflation had already stayed above the Fed’s 2% long-run goal.
- Trading and prediction markets reacted quickly: Polymarket now prices a roughly 52% chance the Fed raises rates before year-end, and CME FedWatch shows a 42.7% probability of higher rates by December. Futures traders still broadly expect rates to stay put for most of the year but are dialing down the odds of additional cuts.
Diverging views inside and outside the Fed
- Some Fed officials counsel patience. San Francisco Fed President Mary Daly has emphasized restoring price stability without harming the economy and argued policymakers can wait for more data before making major moves.
- Others sound the alarm. Former New York Fed President Bill Dudley has warned that prolonged inflation above 2% risks eroding the Fed’s credibility. He argues the neutral rate (r*) may be higher than officials assume and cautions that if inflation expectations become entrenched — say households and markets treating 3–5% inflation as the norm — the Fed could ultimately need much more aggressive action.
Why crypto traders should watch this
- Higher-for-longer rates generally reduce appetite for risk assets, including cryptocurrencies, and can tighten liquidity that has supported asset-price rallies. Conversely, any sign the Fed remains patient could be supportive for crypto risk sentiment.
- Geopolitical shocks that push energy and commodity prices higher — a factor BNP Paribas highlights in linking inflation pressures to the U.S.-Iran tensions — can also stoke broader inflation worries and complicate the Fed’s calculus.
Bottom line: BNP Paribas now expects the Fed to pivot from anticipated 2025 cuts to a path of tightening that could begin in December if jobs keep surprising to the upside and inflation stays elevated. Market odds of a year-end hike have risen, but internal Fed debate means the outlook remains data-dependent and subject to rapid change.
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