Expectations for a Steady June Interest Rate... Fed Moderates Say "Not Yet"

Officials from the U.S. Federal Reserve (Fed) have been repeatedly dousing market expectations that the benchmark interest rate could be held steady as early as June. Not only well-known 'hawkish' figures but also 'moderate' officials have recently emphasized further tightening, arguing that recent economic indicators do not support a pause in June.

[Image source=Reuters Yonhap News]

On the 18th (local time), Lori Logan, President of the Dallas Federal Reserve Bank, dismissed the possibility of a rate hold in June, citing recent economic data at the Texas Bankers Association conference held in San Antonio.

She said, "We have made some progress by raising rates in the last 10 Federal Open Market Committee (FOMC) meetings," but added, "In the coming weeks, indicators may show that skipping a rate hike is appropriate; however, at this point, it is not yet time." This was a public rebuttal to market expectations that the Fed would pause rate hikes starting in June. Logan, classified as a moderate within the Fed, is one of the 11 voting members of this year's FOMC.

On the same day, Philip Jefferson, a Fed Board member, also expressed caution about the possibility of a rate hold, stating that "inflation remains too high." Recently appointed as Vice Chair of the Fed, he remarked, "The past year has not been long enough to fully feel the effects of rate hikes," leaving room for further tightening. James Bullard, President of the St. Louis Federal Reserve Bank and a well-known hawk within the Fed, supported tightening in a foreign media interview, saying, "The pace of inflation slowdown is slower than expected. We need to insure by raising rates a bit more."

Contrary to the Fed's indication of a possible pause in its monetary policy statement at the May FOMC, Fed officials have been making statements that seem to support additional tightening. John Williams, President of the New York Federal Reserve Bank and considered the Fed's third-ranking official, recently warned, "We have not said that rate hikes are over," adding, "Further increases are possible depending on the data." Loretta Mester, President of the Cleveland Federal Reserve Bank, and Michelle Bowman, a Fed Board member, also left open the possibility of further hikes.

This creates a significant gap with market expectations that had anticipated a pause in June. According to the Chicago Mercantile Exchange (CME) FedWatch tool, as of the afternoon of that day, the federal funds futures market reflected nearly a 65% chance that the Fed would hold rates steady in June. However, this bet has clearly declined from about 71% the previous day and 89% a week ago. Conversely, the probability of an additional "baby step" (a 0.25 percentage point rate hike) has risen from the 10% range a week ago to 28% the previous day and about 35% on that day. Art Hogan, Chief Market Strategist at B. Riley Wealth Management, said, "One statement that shook the market a bit this morning was from Lori Logan, President of the Dallas Fed," indicating increased market caution toward tightening.

The weekly initial jobless claims data released that day also suggested that the labor market remains strong. According to the U.S. Department of Labor, last week's claims decreased by 22,000 from the previous week to 242,000, below Wall Street's forecast of 255,000. Continuing claims, which count those claiming unemployment benefits for at least two weeks, fell by 8,000 to 1.8 million. Despite the Fed's aggressive tightening, unemployment has not risen as much as expected.

Having declared war on inflation, the Fed has raised the U.S. benchmark interest rate to 5.0?5.25% through ten consecutive rate hikes since March last year. The next FOMC meeting where rate decisions will be made is scheduled for June 13?14.