WRAPUP 2-A June skip jumps to the fore following latest Fed comments
In what some viewed as a message from the Fed's leadership, Fed Governor and vice chair nominee Philip Jefferson said any decision to hold rates steady should not be viewed as the end of the tightening cycle. "Skipping a rate hike at a coming meeting would allow the (Federal Open Market) Committee to see more data before making decisions about the extent of additional policy firming," Jefferson said at a financial stability conference in Washington.
Federal Reserve officials including the vice chair-designate pointed towards a rate hike "skip" in June, prompting a quick reversal of market expectations for another hike as the U.S. central bank weighed the value of caution against still strong inflation data. In what some viewed as a message from the Fed's leadership, Fed Governor and vice chair nominee Philip Jefferson said any decision to hold rates steady should not be viewed as the end of the tightening cycle.
"Skipping a rate hike at a coming meeting would allow the (Federal Open Market) Committee to see more data before making decisions about the extent of additional policy firming," Jefferson said at a financial stability conference in Washington. Leaning toward what some have called a "hawkish pause," with rates held steady for now but the door left open for further increases, Jefferson said that "a decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle."
Though Jefferson's nomination as vice chair is still pending in the U.S. Senate, his remarks were taken as a cue, just two days before the start of a blackout period that prohibits further public comment about the June 13-14 policy meeting. "We are as certain as we can be that this message would have been agreed with chair (Jerome) Powell beforehand and represents the collective Fed leadership view," said Evercore ISI vice chairman Krishna Guha, who called it "an authoritative signal that the Fed leadership is not intending to raise rates in June."
Since the Fed's last meeting and with inflation showing little recent improvement towards the Fed's 2% target, markets have been on a seesaw trying to determine if the Fed is going to raise its policy rate in June or not. After Jefferson spoke investors reset expectations yet again, with prices of futures tied to the Fed's policy rate reflecting a less than one in three chance of a June rate hike compared with about a two-in-three probability before his remarks. Philadelphia Fed President Patrick Harker added to the case.
"I am in the camp increasingly coming into this meeting thinking that we really should skip," Harker said, though data due on Friday about the U.S. job market "may change my mind." The rate hike "skip" has now become jargon for an emerging compromise between concerns inflation is not yet controlled with fears the economy may slow sharply as banks pull back on credit.
The Fed's main measure of inflation did accelerate in April and remains more than twice the central bank's target, data that has prompted some officials to say rates need to continue higher. "I don't really see a compelling reason to pause," Cleveland Fed president Loretta Mester said in an interview published Wednesday in the Financial Times.
Fed Governor Michelle Bowman, meanwhile, said that some of the factors the Fed has hoped would lower inflation, such as a weakened housing market, may have provided less help than expected given what may be the beginnings of a housing rebound. Jefferson acknowledged inflation remains "too high" and that "by some measures progress has been decelerating recently."
But he also said he expected the economy would remain sluggish for the rest of the year as households spend down savings built up during the COVID-19 pandemic, and credit gets scarcer and more expensive. "I expect spending and economic growth to remain quite slow over the rest of 2023," he said. While Jefferson does not expect a recession, he noted that there are reasons to be careful after 15 months in which the policy rate was raised by 5 percentage points.
"History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect," he said.
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