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Strong Economic Indicators Question Federal Reserve's Pause on Rate Hikes

Key US economic metrics may spur the Federal Reserve's reconsideration of their policy adjustment.


A Wake-Up Call for Fed

Recent economic figures from the US present a robust portrait that may reshape the Federal Reserve's monetary approach toward managing skyrocketing inflation. Last Friday's data was surprisingly stronger than anticipated, making a compelling argument for additional tightening of monetary policies.

Signals of a Healthy Economy

An upward surge of 0.8% in consumer spending last month was a promising sign, indicating the economy is not teetering toward a recession. However, this news is a double-edged sword for policymakers. On the one hand, they welcome healthy economic activity. On the other, it adds fuel to the already inflating prices. Moreover, a rise in core inflation to 4.7%, from 4.6% in March, emphasizes the Federal Reserve's ongoing struggle to contain inflation, which stands well above its 2% target.

The Future of Rate Hikes: An Uncertain Path

These strong economic indicators and potential progress in Washington over a debt limit increase to prevent a catastrophic US default cast a shadow of doubt over the Federal Reserve's plans to "pause" its rate hikes. Despite Fed Chair Jerome Powell hinting at a pause earlier, the latest data could prompt a shift in strategy. This sentiment is echoed by Cleveland Fed President Loretta Mester, who suggests additional tightening may be necessary based on the current inflation figures.

Trade Expectations and Future Predictions

Traders of interest-rate futures interpret the data less ambiguously and are now wagering that the Federal Reserve will opt for an 11th consecutive interest rate hike in June. This contradicts earlier bets that favored a pause in June. LHMeyer analysts, who initially believed the Fed would halt raising rates, now project two more rate increments, pushing the benchmark to 5.6%.

A June Pause?

Despite all these predictions, a rate hike next month isn't guaranteed. A crucial labor market review and fresh inflation data will precede the Federal Reserve's meeting in mid-June. Furthermore, the Fed keeps a watchful eye on credit conditions, with Mester stating that the recent regional bank failures have not caused "extra" tightening. However, expectations are high for a rate hike in July if June pauses, with future market odds heavily tilted toward this outcome.

The Fed's Standpoint: Hawkish Voices Gain Momentum

Several Federal Reserve policymakers, including the more hawkish Fed Governor Christopher Waller, underscore the need for further tightening given the lack of significant progress on inflation. Echoing Waller's views, Minneapolis Fed President Neel Kashkari has also argued that persistent inflation may warrant further intervention via monetary policy.

Public Perception and Future Inflation

Interestingly, a recent University of Michigan survey revealed that households predict a deceleration in inflation over the next year to 4.2%. This indicates that the public's future price expectations, which the Fed believes significantly influence current readings, could begin to ease.