CFR's Rebecca Patterson: It makes sense that the market is biased toward rate hikes

Summary

Rebecca Patterson argues the U.S. economy remains resilient and inflation is still above target, supporting a market bias toward rate hikes rather than cuts. She sees rate cuts this year as off the table and expects any material balance-sheet tightening to be a 2025 story. Oil prices pose an upside inflation risk, while a PCE methodology change could offer some disinflationary help in September.

• U.S. retail sales and bank reports suggest continued economic resilience.
• Inflation is mixed: softer CPI/PPI but oil prices and Hormuz risks add upside pressure.
• Fed is likely to keep its focus on inflation with jobs as a back-burner concern.
• Market bias toward rate hikes makes sense given the backdrop.
• Rate cuts this year are essentially off the table.
• Balance-sheet tightening, if used materially, is a 2025 story due to its limited and disruptive effects.
• September PCE methodology change could lower reported inflation by 10-20 basis points.
• Oil prices are an upside risk to watch due to Strait of Hormuz uncertainty.