Traders say pause in rate hikes is most likely outcome The Federal Reserve’s FOMC meeting this week comes at a time when some strategists say a new bull market is underway.this Dow Jones Industrial Average won three games in a row last week, Nasdaq Composite Index Notching its sixth straight weekly gain for the first time since November 2019, all major indexes closed above their 50- and 200-day moving averages on Friday.
“The bear market is officially over,” Bank of America equity strategist Savita Subramanian said recently, noting that S&P 500 Index Already up 20% from the October 2022 low.
Some question the call for a new bull market based on the narrowness of market leadership — a handful of the biggest tech stocks are responsible for much of the market index’s rally. But there is another important reason why investors should not be overconfident. Even if the Fed decides to pause when it announces its latest FOMC decision on Wednesday, a longer-term shift by the Fed during its most aggressive monetary policy period since the 1980s is by no means certain or necessary.
That’s according to former Fed Vice Chairman Roger Ferguson.
Last month, the Federal Reserve approved its tenth interest rate hike in more than a year, the fastest tightening of monetary policy by the central bank since the 1980s, hurting not only the stock and bond markets but also the economy and consumers. Had a big impact. In its May FOMC meeting statement, the Fed removed language that said “further tightening” was needed to achieve its inflation target. That helped maintain the majority view in the market that a pause would be announced this week.
But Ferguson was still unconvinced.
“I think the pause here is really closer than the market is expecting right now,” he told CNBC’s “Squawk Box” on Friday. No rate hike.
“Markets should brace for the Fed to continue raising rates, even if this one happens to be a pause,” Ferguson said.
He’s not alone in thinking the Fed’s pause in rate hikes won’t last long. “We think the Fed will end up skipping this month, but will be ready for a July move,” Michelle Girard, U.S. director at NatWest Markets, told CNBC’s senior economics reporter Steve Liesman in an interview last week.
Dennis Lockhart, former Atlanta Fed President, said a pause in rate hikes was a strong possibility. However, he noted that inflation will continue to pose a problem for the Fed in an interview with CNBC’s “Closing Clock Over.” “There are some signs that the decline in inflation is manageable, but it’s very gradual. I think the committee still has a huge challenge, especially on the 2 percent target,” Lockhart said, referring to the Fed’s announcement The target long-term target range for inflation to pick up was lowered to 2%.
On an annualized basis, inflation was slightly below market expectations at 4.9% in April, but remains “sticky” in terms of prices across the economy and many CEOs expect it to stick. The upcoming week will include updated readings on annual and monthly inflation trends, as well as the May consumer price index report due on Tuesday, the first day of the Fed’s two-day FOMC meeting.
Traders react as Federal Reserve Chairman Jerome Powell speaks from a screen at the New York Stock Exchange (NYSE) on May 3, 2023.
Brendan McDermid | Reuters
Ongoing concerns about inflation were among the factors leading Ferguson to see a higher chance of a rate hike on Tuesday. This view is supported by factors such as continued tightness in the labor market. Wage growth has slowed and unemployment has risen. But Ferguson pointed out that there are about 1.7-1.8 jobs for each unemployed person, which is much higher than normal; wages continue to rise, not only in recent national data, but also in anecdotes he hears from CEOs — Ferguson sits on the boards of several major companies, including Alphabet and Corning.
“I think the overall picture is that inflation and inflationary pressures are higher and more sticky than the 2% number the Fed has been targeting. So I think the data that has been there is telling us more rate hikes,” he said.
Others see the recent cooling in the labor market as a sign that the Fed may soon need to moderate its rate-raising strategy. Wharton professor Jeremy Siegel recently told CNBC that while the Fed has expressed a strong commitment to lowering inflation, the central bank’s dual mandate is to achieve its target inflation rate and promote maximum employment. Unemployment remains extremely low historically — below 4% — but jobless claims recently hit the highest level since October 2021.
“I’m talking about trends here,” Siegel said.
For now, Siegel said, the Fed can be “as aggressive and hawkish as they are,” as unemployment hasn’t picked up much and workers continue to feel confident about their job market prospects. There are some signs that worker confidence is waning.The Conference Board’s latest consumer sentiment index shows that consumers’ assessments of current employment conditions have experienced a “Worst Deterioration” in consumer sentiment data it tracks for May. Overall, the latest data on the labor market supports Fed Chairman Jerome Powell’s view that the central bank can engineer a soft landing for the economy, labor economists told CNBC.
“There’s nothing here that makes me think we’re not in a soft landing,” Rucha Vankudre, senior economist at labor market consultancy Lightcast, said in a recent interview after the May nonfarm payrolls report. I would not be surprised. All the indicators point to the economy moving in the right direction.”
Nick Bunker, director of economic research at Indeed Hiring Lab, said all recent data points broadly fit the soft landing scenario. “The overall picture here is that the labor market is cooling in a sustainable manner. There are signs of moderation, not a lot of red flags,” Bunker said.
But there’s an old saying on Wall Street that the job market is always the last to know when a recession is coming.
“Let me say one thing,” Siegel told CNBC. “If we get a negative jobs report in the next month, the next two months, it will hit the headlines, for the first time since Covid. And then people will say, ‘Oh, I can guarantee Will I get? Another job?’ That’s going to play into politics, and I think that’s going to put pressure on the Fed on the other side, and then they’re going to start saying, ‘Well, maybe inflation will turn around.”
Goldman Sachs recently lowered its view on the likelihood of a U.S. recession, but its chief executive David Solomon (who still believes high inflation will persist) and Ferguson remain unsure how future decisions by the Fed will affect the economic outlook. Solomon told the recent CNBC CEO Council Summit that, based on his view now, there are “some structural things going on” related to inflation that will make it difficult for the Fed to get back to the 2% target “easy,” even if the Fed On the economic front, no rate cuts are expected before the end of the year — something bond traders have been betting on.
Ferguson worries that high inflation could force the Fed to raise interest rates to levels that would effectively force the U.S. into recession. “I still think a recession is a real possibility. The hope is fleeting and shallow, but you know, let’s wait and see, and let’s hope that Goldman is right,” Ferguson said.
Former Fed Governor Frederick Mishkin also expressed concern about inflation and believes the Fed is right not to pause in June.
“I can understand why (the Fed) might want to (pause) and it wouldn’t be scary if they did,” Mishkin said in a recent CNBC interview. “But I think we’re in a situation where the inflation numbers are still high, coming down very slowly towards the 2% target.”
He said Mishkin was more worried about underlying inflation, which is a reliable number that predicts the path of inflation going forward. “The economy and the labor market are still strong, with some slack, but there’s still a long way to go before we get inflationary pressures under control, so I think the Fed is going to have to raise rates, preferably now to show they’re serious about keeping inflation under control. strong commitment,” he said.
A pause in rate hikes is unlikely to do significant damage to the economy, even if subsequent hikes are needed, Ferguson said, pointing to examples of “early pausers” – the Bank of Canada and the Reserve Bank of Australia. “Both paused and are now back in the process of hiking,” he said.
