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Strong US Economic Data Challenges Fed's Rate Hike Pause Plan

Unforeseen robust economic data in the US has questioned the Federal Reserve's proposed 'pause' on rate hikes, paving the way for further monetary policy adjustments.

FED symbol
FED symbol

US Economy Surprises with Unexpected Strength

Last Friday, Federal Reserve policymakers were taken aback by unexpectedly strong US economic indicators, reinforcing the argument for additional tightening of monetary policy. This move is seen as an effort to decelerate the economy and mitigate the persistently high inflation.

The Surge in Consumer Spending Bolsters Case for Monetary Policy Tightening

In a report from the Commerce Department, consumer spending exhibited an impressive leap, increasing by 0.8% last month compared to March. This growth in consumer spending is further evidence of the economy's resilience, potentially leading to reconsiderations regarding the Federal Reserve's plans.

Inflation Acceleration Heightens Concerns

Meanwhile, the Fed's preferred inflation measurement sped up to 4.4% from a year ago, with core prices—a crucial metric for the trajectory—rising 4.7%, up from 4.6% in March. Considering the Fed's inflation target is 2%, the current inflation dynamics might trigger changes in the central bank's approach.

Jerome Powell
Jerome Powell

Fed's Rate Hike Pause Now Questionable

Despite earlier signals from Fed Chair Jerome Powell that the central bank might halt its rate-hike campaign after ten straight months of increases, recent data has prompted a reevaluation. Fed officials said they would continue closely monitoring economic data, stirring suspicions about further interest rate hikes.

Market Reaction Indicates Expectations for Rate Hikes

The robust economic data and progress towards a deal to increase the debt limit led traders of futures contracts tied to the Fed policy rate to speculate that the Fed might not be finished raising interest rates. Art Hogan, chief market strategist at B Riely Wealth, commented, "Inflation remains stubborn... we still have to be concerned about what's next for the Fed."

Traders Bet on Fed's Interest Rate Increase

Implied yields on the futures contracts now show traders expect a 60% chance the Fed will raise its target range for the benchmark rate, currently at 5%-5.25%, by a quarter of a percentage point at its June meeting. These expectations marked a noticeable shift from earlier in the day when the contracts suggested the same likelihood of the Fed abstaining from a June rate hike.