June’s jump jumps to the fore after the Fed’s recent comments

WASHINGTON (Reuters) – Federal Reserve officials, including the vice president-designate, signaled a “skipping” of an interest rate hike in June, prompting a quick reversal of market expectations for another hike, as the US central bank weighs the value of caution over persistently strong inflation data. .

In what some saw as a message from the Fed’s leadership, Fed Governor and Vice Presidential nominee Philip Jefferson said any decision to keep interest rates steady should not be seen as the end of the tightening cycle.

“Skipping a rate hike at an upcoming meeting would allow the (Federal Open Market) committee to see more data before making decisions about how steady additional policy is,” Jefferson said at a conference on financial stability in Washington.

Leaning into what some have called a “hawkish pause,” with interest rates held steady for the time being but the door open to further increases, Jefferson said that “the decision to hold our policy rate steady at an upcoming meeting should not be interpreted to mean that we have come to peak rate for this cycle.”

Although Jefferson’s vice-presidential nomination is still pending in the US Senate, his remarks were taken as a cue, just two days before the start of the blackout period banning further public comment about the June 13-14 policy meeting.

“We are as certain as we can possibly be that this letter would have been agreed upon in advance with Chair (Jerome) Powell and represents the view of the Fed’s collective leadership,” said Krishna Guha, vice president of Evercore ISI, calling it “a credible signal that Fed leadership is not intends to raise interest rates in June.

Since the last meeting of the Fed and with the recent showing of a slight improvement in inflation towards the Fed’s 2% target, the markets have been on a swing trying to decide whether or not the Fed will raise its policy rate in June. After Jefferson spoke, investors reset expectations again, with futures prices pegged to the Fed’s policy rate reflecting a less than one in three chance of a June rate hike compared to a two in three chance before his remarks.

Philadelphia Federal Reserve President Patrick Harker added to the case.

“I’m in the camp increasingly coming to this meeting thinking we really should get through this,” Harker said, though data scheduled for Friday on the US labor market “may change my mind.”

“Skip” interest rate hikes has now become a logical term for an emerging compromise between concerns that inflation is not yet under control with concerns that the economy could slow sharply as banks roll back credit.

The Fed’s main measure of inflation accelerated in April and remains more than double the central bank’s target, data that has led some officials to say interest rates need to continue to rise.

“I don’t really see a compelling reason to pause,” Loretta Mester, president of the Cleveland Federal Reserve Bank, said in an interview published Wednesday in the Financial Times.

Meanwhile, Fed Governor Michele Bowman said that some of the factors the Fed hopes will reduce inflation, such as a weak housing market, may have provided less help than expected given what may be the beginnings of a housing rebound.

Jefferson acknowledged that inflation remains “very high” and that “progress has been slowing recently by some measures.”

But he also said he expects the economy to remain sluggish for the rest of the year as households spend savings built up during the COVID-19 pandemic, and credit becomes scarcer and more expensive.

“I expect spending and economic growth to remain very slow through the rest of 2023,” he said. While Jefferson does not expect a recession, he did note that there are reasons to be cautious after 15 months in which the policy rate has been raised by 5 percentage points.

“History shows that monetary policy operates with long and variable delays, and that a year is not long enough for demand to feel the full impact,” he said.

(Reporting by Howard Schneider). Editing by Paul Simao, Nick Zieminski, and Daniel Wallis

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