Financial markets are convinced that the Federal Reserve will “skip” an interest rate hike and focus its attention on raising rates again in July.
But not all economists agree. Some are anticipating a 25-basis-point hike in the Fed’s policy interest rate next week, which would bring the benchmark rate up to a range of 5.25%-5.5% and mark the 11th straight meeting with a hike.
“The balance of the data still points to another hike,” said Andrew Hollenhorst, chief U.S. economist at Citi, in an interview with MarketWatch. He stressed repeatedly, however, that this forecast was a “close call.”
Hollenhorst pointed to the “strong” 0.4% increase in the April reading of the core personal consumption expenditure price index, which excludes food and energy prices. Added to a strong inflation reading, the labor market also showed some strength, adding 339,000 jobs in May.
Jonathan Millar, senior U.S. economist at Barclays, agreed that there was “real tension between the data we’ve gotten since the May meeting and the idea that the Fed would be comfortable pausing.”
Millar said his baseline view is that the Fed skips a rate rise next week, but he added that he thinks the chances of a hike are very, very high.
“Boy, is it close for us,” Millar said in an interview.
No matter what happens in June, Millar thinks the Fed will eventually engineer two more 25-basis-point hikes, bringing the benchmark rate up to 5.5%-5.75% before it is finished.
Fed officials will announce their decision at 2 p.m. Eastern. That will be followed by a press conference by Fed Chair Jerome Powell at 2:30 p.m.
The sentiment that the Fed would skip another rate rise in June arose after two officials, Fed Gov. Philip Jefferson and Philadelphia Fed President Patrick Harker, mentioned the possibility in back-to-back speeches on May 31.
Harker portrayed a skip in June as a return to a normal practice in which the Fed does not make a move at every meeting.
Jefferson, meanwhile, said a skip in June should not be interpreted to mean that the Fed was done raising rates.
Hollenhorst said the markets misinterpreted the Fed guidance.
“I think what [the Fed] tried to do in this intermeeting period was not give us any guidance,” he said, but he added that it is hard for markets that have been conditioned by a hand-holding Fed clearly signaling its intentions.
After the release of consumer price inflation Tuesday, the market is now pricing in only about a slim chance of a rate hike next week.
Both the Bank of Canada and Australia’s central bank recently surprised traders by delivering hikes instead of holding steady.
Luke Tilley, a former Fed staffer who is now chief economist for Wilmington Trust Investment Advisors, warned that stress in the banking sector could re-emerge if the Fed surprises the markets with another hike.
“If they were to surprise the markets right now, that would compound the regional banking stress” and make the Fed’s job much harder, he said in an interview.
Tilley said he thinks that the Fed is done raising interest rates and that the central bank will cut rates before the end of the year.
“Inflation is going to be much lower, the economy is going to be much slower and long-term inflation expectations are still very much in check,” Tilley said.
Hollenhorst noted that the market is forecasting a rate hike in July, so a move in June “would not be that big of a surprise to the market.”
The yield on the 10-year Treasury note
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has risen to 3.79% from a low of 3.3% prior to the Fed’s last meeting, in May.
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