Sacrine on the mother
Investors and economists expect the Federal Reserve to end a streak of 10 consecutive interest rate hikes on Wednesday by keeping the interest rate unchanged on Wednesday. But don’t call it a pivot or even a pause.
Fed officials preferred The term “skip”, indicating that they will skip the rate increase at the June meeting in order to assess the impact of the five percentage point tightening they have already done. It will also give them a chance to see if the pressure from the banks in the spring will do some work for them.
The market is anticipating a skip at the FOMC meeting in June, as the swaps market indicates a 72.4% probability of maintaining the target interest rate range for federal funds at 5.00%-5.25%. Economists agree, according to a Bloomberg survey of 46 economists.
FOMC members have long said that giving up on a rate hike does not mean they are considering lowering their target federal funds rate range anytime soon. The option remains open to resume hikes if the data warrants.
In fact, market activity shows that traders are anticipating a 25 basis point rate hike at the July 25-26 meeting. CME FedWatch assigns a probability of 53.0% for this action, and a probability of 16.4% for the rate range to be 5.50%-5.75%.
So, assuming the Fed does not change its policy rate in June, market participants will closely monitor officials’ expectations for the rate’s path in their economic forecasts, which are released at a rotating meeting.
In the last chart, at the March meeting, the median rate forecast for the end of 2023 was 5.1% for the end of 2024 was 4.3%.
Their updated forecasts for rates will depend on their economic outlook of course. Last time, officials surprised Fed watchers by raising their year-end forecast for core personal consumption expenditures inflation to 3.6% from 3.5% previously.
James Knightley, chief international economist at ING, thinks the Fed is likely to overtake, but says: “It will be soon” as economic data has been mixed.
Goldman Sachs’ David Merkel agrees with the view that the Fed will pause because “the Fed’s leadership has clearly indicated that it sees a pause for now as the prudent course due to uncertainty about both the delayed effects of interest rate hikes that already introduced and the effect of their tightening. Bank credit increases the risk of accidental over-tightening.”
ING’s Knightley isn’t ruling out a June rally. With inflation still rising, non-farm payrolls jumping by 339K, Australian and Canadian banks raising interest rates, and hawkish comments by a few Fed officials, “the result was that pricing the June FOMC meeting isn’t far from a currency draw.” (just below) at 10 basis points) and July is looking for a suitable bet to raise the price (at 21 basis points),” Knightley wrote in a recent note to clients.
Tuesday’s CPI report could be a deciding factor. The May consumer price index is expected to have increased by 0.3%, down from a 0.4% rise in April. Core CPI is expected to have increased by 0.4%, unchanged from its monthly rate in April. The shock from this number may prompt the FOMC to increase its rate by another 25 basis points to ensure that it is in constrained territory.
Even if the CPI number comes in higher than expected, Goldman Merkel predicts that it will be difficult for the Fed to “back off its guidance at this point.”
South African analyst Damir Tokic sees the Fed continuing to tighten as inflation is unlikely to come down as quickly as central bankers would like. “A return to the 2 percent inflation target is unlikely without a deep recession,” he said.
Bank of Australia analyst John M Mason reviews the questions central bankers will face this week.