Traders react as Federal Reserve Chair Jerome Powell is seen giving remarks on a screen, on the floor of the New York Stock Exchange (NYSE), May 3, 2023.
Brendan McDermid | Reuters
the US Federal Reserve may be forced to defy market expectations by raising interest rates aggressively again later this year if sticky inflation and tight labor markets persist, according to Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank.
After raising the fed funds rate by 25 basis points to the 5%-5.25% target range earlier this month, the market is pricing in around a 60% probability that the central bank will stop its cycle. to tighten money at the meeting in June, according to the CME Group The Fed Watch tracker in the market prices of fed funds futures.
The Fed has been hiking rapidly over the past year in a bid to curb high inflation, but the market expects policymakers to begin cutting rates before the end of the year. ANNUAL Headline inflation fell to 4.9% in Aprilthe lowest in two years, but remains above the Fed’s 2% target.
Meanwhile, the labor market remains tight, with jobless claims still near historic lows. Employment growth also hit 253,000 in April despite a sluggish economy, while the unemployment rate sat at 3.4%, tied for the lowest level since 1969. Average hourly earnings rose 0.5% for the month and rose 4.4% from a year ago, both were higher than expected.
Antonucci told CNBC “Squawk Box Europe” on Friday that Quintet disagreed with the market price of rate cuts later in the year.
“We think it’s a hawkish pause — it’s not a pivot from hawkish to dovish — it’s a pause, inflation is high, the labor market is tight, and so the markets could be disappointed if the Fed will not lower the rates,” he said.
Given the strength of the labor market, Antonucci suggested that a rate cut “seems like an implausible scenario and this is the first issue.”
“The second is that the tension here is that if the labor market remains strong, if economic activity does not eventually deteriorate to a point where there is a recessionary environment and disinflation, the Fed may need to tighten the policy is too aggressive and then you have. a recession including an income recession,” he added.
“The Fed may need to hike more aggressively if inflation remains high.”
Antonucci’s position mirrored the message from some members of the Federal Open Market Committee this week, who reiterated the importance of waiting to monitor the residual impact of earlier rate hikes but also indicated that the data had yet to deliver. justification for a dovish pivot.
Cleveland Fed President Loretta Mester said Tuesday that the central bank is not yet at the point where it can “hold” rates, while Dallas Fed President Lorie Logan suggested Thursday that the data so far is not There is reason to skip the rate hike at the June meeting.
Investors will be watching closely a speech from Fed Chairman Jerome Powell on Friday for clues on the FOMC’s potential trajectory.
“Jerome Powell was particularly critical of the ‘stop and go’ monetary policy of the 1970’s which contributed to the stagflationary foundation of the economy, and which required an aggressive monetary policy to restore price stability,” said Quincy Krosby, chief global strategist at LPL Financial.
“If he mentions it when he speaks on Friday, the market may interpret it as a signal that unless the data improves significantly about inflation, he will promote another rate hike.”
Krosby added that the week’s “Fedspeak chorus” served to remind markets that the central bank’s mandate is to restore price stability, and that the FOMC is poised to raise rates again to ” the job will be done if inflation doesn’t cooperate.”