The tightening storm strikes again! Société Générale warns that the Federal Reserve may raise interest rates three times before March next year

English Finance APP noted that Societe Generale expects the Federal Reserve to start raising interest rates in September, as persistent inflation and an improving labor market are pushing policymakers toward a tighter stance.

According to the latest report released by Societe Generale's Chief US Economist, Yan Gruen, the bank now forecasts the Federal Reserve will hike rates by 25 basis points each at the September and December meetings, followed by another hike in March 2027. However, the report notes that the last rate increase carries relatively high uncertainty.

For investors, this revised outlook challenges the market's expectations for a milder tightening cycle and could put upward pressure on US Treasury yields and the US dollar. Rising interest rates also threaten the valuations of growth stocks and other rate-sensitive assets, while potentially boosting bank profits and the appeal of cash and short-term bonds.

Societe Generale's forecast would bring the upper and lower median bounds of the federal funds target range to 4.125% by the end of 2026, reaching 4.375% in early 2027. The report states that as of August 28, market pricing indicated a lower peak, near 4.2%.

This change comes after Federal Reserve Chair Kevin Warsh's speech at the central bank's annual symposium in Jackson Hole, Wyoming. Warsh did not offer clear guidance on the future path of interest rates but devoted considerable attention to the persistently high level over the past year.

Gruen stated that Warsh's remarks suggest that if inflation fails to moderate, the Fed Chair would be open to further tightening policy.

According to Societe Generale's analysis of trimming mean indicators, the annualized level of core inflation has hovered around 3%. Non-housing core services—which comprise nearly 60% of the Core Personal Consumption Expenditures (PCE) Price Index—have shown persistent inflationary momentum since the pandemic.

The report points out that these pressures predate the tariff hikes expected in 2025 and the oil price shocks stemming from conflict between Iran and the US. These two supply-side shocks would push already high inflation even higher and deepen concerns that repeated disruptions might ultimately unmoor consumers’ expectations for future prices.

Meanwhile, signs that the labor market has stabilized and begun to recover since the end of 2025 give the Federal Reserve greater flexibility to focus on addressing inflation.

Nevertheless, divisions persist within Fed officials. One set of officials expects core inflation to ease in the second half of this year and therefore advocates keeping rates unchanged; the more hawkish camp, however, argues that inflation is structurally stubborn above the Fed's 2% target and calls for tighter monetary policy.

Societe Generale points out that officials supporting a hold in rates may still comprise the majority of voting members at the Federal Open Market Committee (FOMC). However, some members in this camp have indicated that if monthly core PCE inflation does not fall below 0.2%, they may support further rate hikes.

Societe Generale expects core PCE inflation for August to be around 0.25%, similar to the pace in July. This would push the second-half inflation rate well above the monthly increase of about 0.17% that is consistent with the Fed’s annual target.

The bank expects the Fed to proceed cautiously, spreading three rate hikes over six months. This approach would allow policymakers to assess their impact on economic activity and could make the September hike more acceptable to officials inclined to keep rates unchanged.

The report adds that Dallas Federal Reserve President Lorie Logan and St. Louis Federal Reserve President Alberto Musalem also favor mild, incremental rate hikes, which would effectively reverse the three "preemptive" rate cuts implemented in 2025.

In Societe Generale's forecast, the March 2027 hike remains the most uncertain part. Inflation may slow more quickly than expected, or earlier hikes may weaken the economy enough to convince the Federal Reserve to stop raising rates after December.