FTN economist sees more Fed rate hikes as inflation pressures persist

The Federal Open Market Committee held rates steady at its Oct. 27-28 meeting, a move that was anticipated by many economists, including Will Compernolle, Macro Strategist for FTN Financial. Compernolle, who addressed about 100 people at the “From Insight to Action” Financial Services Leadership Forum, Tuesday in Kansas City, Mo., said persistent inflation pressures outweigh concerns about slowing employment growth. .Compernolle said inflation remains the Federal Reserve’s greatest concern, particularly because underlying price pressures were accelerating even before the war in Iran drove energy prices higher.“Inflation has been above target for over five years,” he said, explaining that policymakers increasingly believe additional monetary tightening is necessary to return inflation to the Fed’s 2 percent objective.Elevated energy costs present continuing risks. Higher diesel, jet fuel and fertilizer prices could gradually spread throughout the economy, with some effects not becoming apparent until 2027.Compernolle noted that fertilizer purchased before the conflict was used for much of this year’s planting, delaying the impact of higher costs on grocery prices.Despite these pressures, economic growth has remained surprisingly resilient, averaging approximately 2 percent annually through numerous disruptions.A significant portion of that growth, however, comes from investment in artificial intelligence infrastructure, including data centers and information-processing equipment. Such investments require substantial capital but generate relatively fewer jobs.Compernolle explained that slower employment growth does not necessarily signal economic weakness. Reduced immigration and baby boomer retirements have substantially slowed labor force expansion, lowering the number of new jobs needed to maintain equilibrium.With unemployment near 4.2 percent to 4.3 percent, Fed officials believe the labor market remains balanced, giving them room to raise rates without substantially increasing recession risks.Compernolle also discussed changes under Federal Reserve Chair Kevin Warsh, who assumed leadership in May. Warsh favors less public communication, a smaller Fed balance sheet and potentially fewer policy meetings.However, Compernolle emphasized that significant institutional changes require support from other Federal Open Market Committee members.Looking ahead, he said policymakers and bond investors generally agree additional rate increases will be needed, although their timing and ultimate magnitude remain uncertain.The central question, Compernolle suggested, is no longer whether further tightening is necessary, but how quickly rates will rise and where they will peak.The Forum was sponsored by Forvis Mazars, Stinson, Olsen Palmer and the Bank Holding Company Association.