Dear clients,
Federal Reserve policymakers received a dose of unexpectedly strong US economic data on Friday, which bolstered the case for further monetary policy tightening to reduce persistently high inflation.
A 0.8% rise in consumer spending last month compared with March was good news, showing that the economy is not on the brink of recession, but discomfort for policymakers waiting for a slowdown that could ease rising pressure on prices. And the increase in core inflation to 4.7%, up from 4.6% in March, underlined the Fed’s less-than-steady progress in fighting inflation. The US central bank’s inflation target is 2%.
Combined with seemingly some progress on a deal to raise the debt ceiling and avert a catastrophic US default, the latest data raises doubts that the Fed will indeed „pause“ its campaign to raise rates, as Chairman Jerome Powell signalled earlier this month.
Interest rate futures traders are seeing less subtlety in the numbers and are now expecting an 11th consecutive interest rate hike in June, a reversal of the June pause bets made after the last hike on May 3.
Next month’s rate hike is not a definitive decision: Key labour market data from next Friday and fresh inflation data expected on 13 June are still to be announced before the Fed meeting on 13-14 June. However, there are growing expectations that even if the Fed leaves rates unchanged in June, it will hit the brakes in July. In the futures markets the odds are three to one in favour of a rate hike until then.
Fed Governor Christopher Waller — one of the Fed’s most hawkish voices — made this point earlier last week. He said that while key data in the coming weeks as well as uncertainty over credit conditions could support a temporary rate halt, the lack of progress on inflation points to the need for further tightening.
