Fed may have to defy market expectations and raise rates: economist

The US Federal Reserve may have to defy market expectations by aggressively raising interest rates again later this year if viscous inflation and tight labor markets persist, according to Daniel Antonucci, chief economist and macro strategist at Quintet Private Bank.

Having risen by 25 basis points to move the federal funds rate to the target range of 5%-5.25% earlier this month, the market is pricing in around the 60% possibility that the central bank will pause the monetary tightening cycle at its meeting in June, according to the CME Group Fed Watch tracker Prices in the federal funds futures market.

The Fed has been rising rapidly over the past year in an effort to control high inflation, but the market expects policymakers to start cutting interest rates before the end of the year. Annual headline inflation fell to 4.9% in April, its lowest level in two years, but remained well above the Fed’s 2% target.

Meanwhile, the job market remains tight, with jobless claims rising but still at historically low levels. Job growth also reached 253,000 in April despite the economy slowing, while the unemployment rate held steady at 3.4%, the joint lowest level since 1969. Average hourly earnings rose 0.5% for the month and increased 4.4% from a year ago, both higher the expected.

Antonucci told CNBC’s “Squawk Box Europe” on Friday that the Quintet does not agree with market pricing for a rate cut later in the year.

“We think this is a hawkish pause — it’s not a pivot from hawkish to dovish — it’s a pause, the level of inflation is high, the labor market is tight, so markets could be disappointed if the Fed doesn’t cut rates,” he said.

Given the strength of the labor market, Antonucci suggested that a rate cut “seems a preposterous scenario and is only the first issue”.

“The second reason the tension here is that if the labor market stays strong, if economic activity doesn’t eventually deteriorate to a point where it’s an environment of stagnation and inflation, then the Fed may have to tighten policy more aggressively and then you have a recession including That’s a slump in profits.”

“The Fed may need to rise more aggressively if inflation remains high.”

Antonucci’s stance mirrors messages from some FOMC members this week, who reiterated the importance of waiting to watch the delayed impact of past rate hikes, but also noted that the data does not yet warrant a dovish approach.

Cleveland Fed President Loretta Mester said Tuesday that the central bank has not yet reached the point where it can “hold” rates, while Dallas Fed President Lori Logan suggested Thursday that data so far does not justify skipping a rate hike. Interest in the June meeting. ..

Investors will closely watch Federal Reserve Chairman Jerome Powell’s speech on Friday for clues to the FOMC’s likely path.

said Quincy Crosby, chief global strategist at LPL Financial.

“If he mentions that when he speaks on Friday, the market could interpret it as a signal that unless the data improves significantly in terms of inflation, he will call for another rate hike.”

Crosby added that last week’s “Fedspeak choir” served to remind markets that the central bank’s mandate is to restore price stability, and that the FOMC is prepared to raise interest rates again to “get the job done if inflation doesn’t cooperate.”