Renaissance Macro's Neil Dutta Says Fed Will Need 4 or 5 Rate Hikes in Total

Since the Fed's September quarter-point hike to a target range of 3.75% to 4%, the argument inside the central bank has been about pace, not direction. On Monday, Nov. 2, one prominent economist put a number on the destination.

Neil Dutta, head of U.S. economic research at Renaissance Macro Research, said on Bloomberg Surveillance that he sees the need for a total of four or five rate hikes from the Fed. He also expects a change to the Fed's inflation expectations in early 2027.

Dutta has framed his case as risk management. He said that "from a risk-management perspective, it probably makes sense to raise rates."

The inflation numbers behind the call

The data since September has not been friendly to the pause camp.

The Bureau of Labor Statistics reported on Oct. 15 that the Producer Price Index rose 1.3% in September from August. Forecasters had expected 0.5%. Annual producer inflation hit 6.3% against an expected 5.3%. The monthly jump was the largest in more than four years, and the annual rate was the highest since 2022.

Consumer prices rose 0.6% in September and 3.7% from a year earlier. Susan Schmidt of Exchange Capital Resources said the hot consumer reading, with core inflation also above expectations, increased pressure on the Fed to move sooner rather than wait.

High energy prices are a main driver of the headline number, according to the Epoch Times' reporting on the Fed's October meeting. The Fed has now missed its 2% target for 66 consecutive months.

Labor market sends a different signal

The jobs data cuts the other way. The economy added just 29,000 jobs in September, far below the 90,000 consensus forecast and down from 133,000 in August. Unemployment edged up to 4.2%.

That weak report is the main argument for patience. Jay Woods, chief market strategist at Freedom Capital Markets, put it this way: "The argument is about the pace of tightening, not necessarily its direction." He added that the Fed raised in September and "can allow that move time to work while assessing whether inflation keeps broadening."

Where Fed officials stand

Dutta's four-or-five-hike call is more aggressive than anything on the record from the officials in these notes.

Fed Governor Christopher Waller said in an Oct. 8 speech that he expects more hikes but that there is "some flexibility about when those hikes will occur." In his words, "The hikes do not need to come at consecutive meetings, but they should be in place in an acceptable period of time."

New York Fed President John Williams has said he is penciling in one more hike this year and none next year. That sits well short of Dutta's path.

San Francisco Fed President Mary Daly told Reuters that hikes are likely needed, but not urgently.

The Fed's own preferred inflation gauge is also running hot. Core PCE rose 3.0% from a year earlier in August, well above the 2% target.

What markets are pricing

Before the Fed's October meeting, CME FedWatch futures priced a 74% chance of a quarter-point hike in December, with another hike expected in March. Goldman Sachs has been positioned for a December 25-basis-point hike.

That pricing covers roughly two more moves. Dutta is describing a longer campaign. If he is right, the Fed's target range climbs well above where traders have it today.

The next test is the December meeting. The Fed will have another round of inflation and jobs data by then. Dutta's call that the Fed's inflation expectations shift in early 2027 would only be tested after that.