New York (CNN) Will the Fed raise interest rates at its next meeting in June – for the 11th time in a row – or pause? Wall Street seems to be betting on the latter, but it was a vertical trip to that consensus last week.
What happened: The Federal Reserve’s meeting earlier this month fueled hopes that interest rates have been raised, at least for the time being. then, Last week’s list of economic data came in stronger than expected.
Retail spending rebounded in April after two months of decline, indicating that consumers are still spending despite tightening financial constraints. Claims for unemployment benefits fell more-than-expected for the week ending May 13, staying below historical averages.
Traders saw a roughly 36% chance last Thursday that the Fed would raise interest rates by another quarter point in June, up from about 15.5% on May 12, according to the CME FedWatch tool.
Next, Fed Chair Jerome Powell weighed in mid-morning on Friday. In a panel with former Federal Reserve Chairman Ben Bernanke, Powell said uncertainty remains surrounding the extent to which demand will decline due to tightening credit conditions and the delayed effects of rate hikes. Traders have narrowed their forecasts to about an 18.6% chance that the central bank will raise interest rates next month, as of Friday evening.
Experts seem to agree that the Fed is unlikely to raise interest rates again in June. “There is no such preparation [for a raise] is a signal and gives us added confidence that the Fed will not hike in June absent a very big surprise in the remaining data, although we should expect a hawkish pause, Evercore ISI strategists said in a May 19 note.
Jim Beard, chief investment officer at financial advisory firm Blunt Moran, expects the Fed to hold interest rates steady in June. But he said that this decision is not static, and the Fed is likely to monitor three major factors in making its decision. These are:
- debt ceiling. President Joe Biden and congressional leaders have assured that the United States will likely not default on its debt. But if such a scenario occurs, it could have dire consequences for the economy and financial markets requiring the Fed to wait for the crisis to be resolved before taking any action.
- evolving financial conditions. The collapse of Silicon Valley Bank, Signature Bank and the First Republic accelerated the tightening of credit conditions due to the collapse of regional banks. While this has complicated the Fed’s rate stabilization plan, it could also benefit the central bank by doing some of its work in its favor by slowing spending.
- deferred effect. Interest rate hikes from the Fed flow through the economy with a lag. Therefore, it will take a few months for the full impact of the severe tightening cycle to be felt in the economy. This means that the Fed may want to pause to monitor the continuing impact of what it has already done.
The Fed has also emphasized that its actions are data driven, which means it will keep a close eye on economic data that comes in before it announces its next interest rate decision on June 14th.
Some of the key data points set for release before then include the April PCE price index (this is the Fed’s preferred inflation measure), the May jobs report, the May consumer price index, and the May producer price index. (The last two reports are due on the two days the Fed meets.)
If these data points show significant weakness in the labor market or persistently low inflation, that helps establish a pause. But signs of a strong economy with little or no signs of slowing may mean that the Fed has more room to tighten – and that it may seize the opportunity.
CEO Morgan Stanley to step down
Morgan Stanley CEO James Gorman, 64, will step down within the next 12 months, he said Friday at the bank’s annual meeting.
“The exact timing of the CEO transition has not been determined, but I expect the board of directors and I anticipate that it will happen at some point in the next 12 months. That is the current expectation absent a significant change in the external environment,” Gorman said.
Gorman, one of the longest-serving US bank chiefs largely responsible for helping lead the company’s sweeping turnaround after the 2008 financial crisis, became CEO in January 2010.
He will take on the CEO role “for a while,” Gorman said, adding that the board has three senior internal candidates in the pipeline for the next CEO role.
Read more here.
Jamie Dimon’s “War Room” sessions are increasing
The June 1 “date ten” — the estimated point at which the US Treasury could run out of cash — is fast approaching. For JPMorgan Chase’s Jamie Dimon, another key date is already in place.
The Bloomberg chief executive said earlier this month that he convened a weekly so-called “war room” to prepare the bank for the possibility of a US default. He said he plans to meet as often as X approaches, and then meet every day by May 21, adding that meetings will eventually take place three times a day.
“I don “t think so [a default] “It’s going to happen, because it gets catastrophic. The closer you get to it, the more you panic,” Damon said.
The debt ceiling negotiations seemed to be moving in a positive direction for most of the past week. Both President Joe Biden and House Speaker Kevin McCarthy have said the US is unlikely to default on its debt and seem optimistic about the path to a deal.
But debt ceiling talks between the White House and McCarthy’s office hit a snag, and negotiators have called off talks, multiple sources told CNN on Friday.
While that doesn’t mean negotiations are completely breaking down, or that the country is heading toward default, it does pose more challenges for the stock market, which has remained relatively resilient despite debt ceiling concerns that are slowly starting to creep in.
Dimon said in the same Bloomberg interview that he would absolutely “love getting off the debt ceiling.”
He said the debt ceiling situation was “extremely unfortunate”. “It should never happen this way.”
Monday: JPMorgan Chase Investor Day.
Tuesday: New home sales in April. Earnings from Lowe’s (LOW).
Wednesday: Minutes of the May Federal Reserve meeting.
Thursday: The second reading is Q1 GDP, April pending home sales, mortgage rates and weekly jobless claims. Earnings from Costco (COST), Dollar Tree (DLTR), and Best Buy (BBY).
Friday: Personal consumption expenditures for April and the final reading of consumer confidence from Mayo University in Michigan.
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