Following the Federal Reserve's September rate increase, JPMorgan expects the tightening cycle to take one more step before the year ends.

Michael Feroli, the bank's chief U.S. economist, recently said that JPMorgan continues to expect the Fed to raise rates by another 25 basis points at its December meeting, but that this would not mark the start of a prolonged hiking cycle extending into 2027.

The Fed previously lifted the target range for the federal funds rate by 25 basis points to 3.75% to 4.00%, its first rate increase in three years. The latest dot plot released in September showed that 16 of the 18 officials who submitted projections expected at least one more rate hike this year, while four anticipated two more increases, with the median year-end policy rate implying one additional 25-basis-point hike within the year.

Feroli believes there is room for the Fed to hold off at its October meeting, since after the September increase the central bank needs time to observe the impact of policy on the economy. JPMorgan therefore places the next rate hike in December, in line with the median path indicated by the Fed's dot plot.

This means JPMorgan expects the pace of policy for the remainder of the year will not keep accelerating, and is more likely to conclude with a single rate increase.

Feroli said inflation continues to show clear characteristics of a supply shock, so the bank does not believe a long-term hiking cycle extending into next year will materialize.

Jobs data becomes key variable for the October rate path

However, if the labor market continues to tighten and wage growth reaccelerates, overly strong economic growth could change this assessment and prompt the Fed to act earlier, as the central bank may begin to worry about the economy receiving "too much good news," Feroli said.

Another judgment from JPMorgan has already shifted the focus to September nonfarm payrolls. The bank noted that initial and continuing jobless claims fell during the month, increasing the risk that September employment data comes in stronger than expected, which could support the market in continuing to bet on an October rate hike.

Job openings data released on Tuesday presented a more complicated picture. As of the end of August, U.S. job openings fell by 256,000 to 7.079 million, below economists' expectation of 7.225 million. Companies are still avoiding large-scale layoffs, but demand for new hiring has cooled somewhat.

Market expectations for September nonfarm payroll gains are also divided. Economists surveyed by Dow Jones expect about 84,000 new jobs, while a Reuters survey puts the figure at 90,000. Prediction markets are relatively more optimistic, with Kalshi data showing the probability of more than 90,000 jobs added in September at close to 60%, and the probability of more than 100,000 at about 50%.

If final employment growth is significantly stronger than the economist consensus, the logic previously put forward by JPMorgan — continued labor market tightening, renewed wage acceleration, and a more hawkish policy path — would gain more data support. Conversely, a continued decline in job openings and slower hiring could limit companies' ability to further expand their workforce.

Inflation leaves room for further rate hikes

Beyond the labor market, JPMorgan's December call is also built on the premise that inflation does not fall back quickly. The U.S. personal consumption expenditures price index for September will be released on Wednesday, with the market expecting headline and core PCE to rise 0.4% and 0.3% month over month, respectively, and 3.7% and 3.3% year over year, with the core gauge still clearly above the Fed's 2% target.

Energy prices have added further uncertainty to inflation. Fed Governor Lisa Cook said this week that demand driven by AI investment and higher oil prices could continue to push inflation higher in the coming months, but she did not explicitly say whether more rate hikes are needed.

Fed Governor Michael Barr was more explicit. He said inflation remains too high, and that recent energy prices and AI investment have pushed the disinflation process "off track," with his baseline scenario still calling for further policy adjustments in the future.

New York Fed President John C. Williams struck a relatively more moderate policy tone the same day. He said there is no need to rush into another move after the September rate hike, and that more data can be awaited, but if the economy broadly meets his expectations, one more increase in the federal funds rate before year-end may still be appropriate.

That phrasing dovetails with JPMorgan's December baseline view: observe in October, then complete the year's final adjustment in December based on employment and inflation performance.

Barclays also lays out a similar path, expecting the Fed to keep rates unchanged in October and then raise rates by 25 basis points in December.