Douglas Racing
The May jobs report doesn’t make the Fed’s June policy decision any easier.
Several Fed officials said they were inclined not to raise rates at the meeting to allow them more time to assess the effects 5 percentage points from interest rate increases that have already been implemented. The couple is more likely to vote for a 25 basis point rate hike.
Then the jobs report for May gave mixed signals, as the number of jobs added came in higher than expected, while the unemployment rate rose to 3.7% from 3.4% in April.
As of Friday, markets were still pricing in a pause, with a 70.1% probability of maintaining the target range for the fed funds rate of 5.00%-5.25%, according to CME FedWatch. a tool. The potential for a 25 basis point rally, at 29.9%, is not insignificant.
For the July meeting, the probability of the rate at 5.25% -5.50% increased to 51.8% from 45.4% on Thursday. The probability of it rising to 5.50% -5.75% jumped to 16.3% from 8.6% the day before.
Hawk pause: Management consulting firm RSM US LLP continues to anticipate a pause in June, but doesn’t see it as a pacifist move. Until recently, most investors expected that once the Federal Reserve stopped raising interest rates, its next interest rate move would be to cut. This may not be the case.
“It’s what the market is pricing in – a hawkish pause in June, potential for further increases in July and a meeting after,” said Toan Nguyen, an economist at RSM in the US.
Recent comments from several prominent FOMC members support this, especially Fed Governor Philip Jefferson, who last week reiterated the message of giving up the hike at the June meeting.
“This decision gives the Fed additional time to assess the delayed effects of monetary policy tightening on the real economy. Given the growing uncertainties surrounding economic activities, particularly within the financial market, we find this to be a reasonable assessment,” said Nguyen.
Other factors could also support a skip-rise scenario, especially with the Treasury set to resell bonds as the debt limit has been suspended. “Concerns about banking pressures and rising bond yields, as the Treasury prepares to flood the market with hundreds of billions in new issues, are likely to resemble a 25 basis point rally,” Nguyen said. “So, in a sense, the market will continue to tighten even if the Fed passes its June rally.”
And if policymakers decide to hold interest rates in a week and a half, what Fed Chair Jerome Powell said in his post-policy press conference would indicate whether it was a “hawkish pause” or a “normal pause,” Nguyen said.
All options open: The explosive payrolls number leaves “all options open” for the Fed in June, said Krishna Guha, strategist at Evercore ISI, but Evercore is still leaning toward stalling at the next meeting followed by a 25 basis point hike in July if the economy doesn’t show more by That time, signs of cooling.
The disagreement between the number of jobs added, which comes from the Labor Department’s Establishment Survey, and the unemployment rate, which comes from the Household Survey, “provides a rationale for skipping June,” Guha wrote in a note to clients. He noted that such a mismatch is not uncommon during an economic turning point.
“We believe the potential for a surge by July continues to rise, and we have our base case under review, but we will not rush into a new base case for a hike in July, as the skip could turn into a pause if the data calms down,” Guha said.
forgery: Despite this, Jose Torres, chief economist at Interactive Brokers, expects the Fed to continue its rate hike path at the June meeting. Strong gains in salaries and wages further support inflation hawks. Meanwhile, he said, job losses for the self-employed, additions to the workforce, an increase in the unemployment rate, and a shortening of the work week are fueling the inflation doves’ argument.
Overall, the data from the past few weeks points to another 25 basis point rally, Torres wrote recently. If that happens, he said, expect a repricing of equities and fixed income as markets are currently anticipating a pause in June and a lift in July.
“I think that a pause followed by an increase in prices would be misleading and could lead to unjustified easing of financial conditions, which could threaten a new wave of inflationary pressures,” he added.
Whichever choice the Fed makes, it will be tough.
Another key data point, the May consumer price index, comes out on June 13, which could cause Fed officials to scrap their pause plans if inflation heats up.
RSM’s Nguyen urges caution: “With policy pricing at or very close to its peak, now is the time for the Fed to approach the increasingly sensitive economy with a more nuanced approach in order to steer it toward a soft landing.”