The market is waiting for rate cuts, but Allianz's Chief Economist says the Fed may raise rates in September.

Allianz Chief Economist Ludovic Subran made a contrarian call, arguing that the Federal Reserve (Fed) may have to raise rates in September, as U.S. inflation could peak above 3.7%, and AI, fiscal stimulus, and the energy sector continue to support economic growth. He also believes the European Central Bank (ECB) rate hikes are nearing their end, and monetary policies in the U.S. and Europe are diverging.
(Prelude: U.S. June nonfarm payrolls rose only 57k, far below expectations! Prior month revised down by 74k, Fed rate hike expectations plummeted)
(Background: No promise of a July rate cut! New Fed Chair Walsh's international debut: "Inflation is too high")

Key Takeaways

• Allianz Chief Economist Subran believes the Fed may raise rates in September, contrary to market expectations of rate cuts.
• He estimates U.S. inflation could peak above 3.7%, with AI, fiscal, and energy as three engines supporting economic growth.
• After last month's "insurance rate hike," the ECB is expected to hold steady, marking a formal divergence in U.S. and ECB policy.

As markets bet on an imminent Fed rate cut after the weak June payrolls (only 57k), Allianz Chief Economist Ludovic Subran struck a contrarian note. He said U.S. payroll data is indeed weak, but inflation could peak above 3.7%, and AI, fiscal stimulus, and the energy sector are still supporting economic growth, so the Fed may have to raise rates in September. This runs counter to market sentiment betting on easing.

U.S. and European Central Banks Heading for Divergence

Subran believes this is the real divergence between the U.S. and Europe. The ECB raised rates only last month, but he described it as an "insurance rate hike." Based on current data, the process seems to have ended, and the ECB will not take further action.

"It was an insurance rate hike, but from the current data, this process seems to have ended. I think this is the real divergence between the U.S. and Europe."

The Iran War Hasn't Been Factored In Yet

Speaking of geopolitical risks, Subran said the trauma effects of the Iran war take time to manifest, and the economy is still bearing the cost of the war, though conditions have improved significantly from a few weeks ago. For risk assets like Bitcoin, whether the Fed raises or cuts rates in September will be the most critical macro variable in the second half of the year.

Frequently Asked Questions

Why does the Allianz economist think the Fed will raise rates in September?
Subran believes U.S. inflation could peak above 3.7%, and AI investment, fiscal stimulus, and the energy sector are still supporting economic growth. Even with weak payrolls, the Fed may be forced to raise rates in September to curb inflation.

Will the ECB continue to raise rates?
Subran expects not. He described the ECB's rate hike last month as an "insurance" move. Based on current data, the cycle is nearing its end, which also creates divergence between U.S. and European monetary policies.