Financial markets are increasingly pricing in expectation of a June interest-rate hike by the Federal Reserve, and if the central bank doesn’t want to go through with one, time is running out to push back.
That’s according to Tim Duy, chief U.S. economist at SGH Macro Advisors, looking at recent speeches.
“Fed leadership has directed us to expect the [Federal Open Market Committee] will stand pat at this next meeting and bill the move as a skip not a pause, but market participants aren’t ready to buy that story,” he said. “In public appearances, Fed hawks are running circles around the doves and the latter’s’ insistence that they remain data dependent isn’t helping them build a case for not hiking in June.”
There’s a 60% chance of a quarter percentage point hike in the policy rate at the June 14 Fed meeting, according to probabilities derived from Fed funds futures.
Duy pointed out that Chair Jerome Powell, Gov. Philip Jefferson — the nominee to be vice chair — and New York Fed President John Williams each have leaned into a dovish policy direction in their most recent public comments.
Powell in particular framed the idea that after 500 basis points of rate hikes as well as a regional bank crisis, the central bank can afford to wait. Even Gov. Christopher Waller, a hawk, talked about he could accept a “skip” at its next meeting.
“If Fed leadership wants to skip the June meeting, it needs to gain control over that narrative before the employment report,” Duy said.
The U.S. employment report for May is due to land on Friday, followed by consumer price inflation just as the FOMC meets in mid-June. Duy says the Fed’s best chance to counter the market’s expectations will be Jefferson’s speech on Wednesday this week, when he is due at 1:30 p.m. Eastern to speak on financial stability and the U.S. economy.
“In my career, I don’t think I have ever seen market participants disregard Fed leadership such as I am witnessing in this inter-meeting period,” Duy concluded.
The S&P 500
SPX,
opened higher Tuesday after a three-day break. The yield on the 2-year Treasury
TMUBMUSD02Y,
fell 4 basis points to 4.53%.
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