Fed could be forced to defy market expectations and hike: Economist

According to Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank, the US Federal Reserve may be forced to defy market expectations by aggressively raising interest rates again later this year if inflation persists and tight labor markets.

After rising 25 basis points to bring the fed funds rate into the target range of 5% to 5.25% at the start of the month, the market is pricing around a 60% chance that the central bank will halt its tightening cycle. monetary policy at its June meeting, according to the CME group Fed Watch Tracking prices in the fed funds futures market.

The Fed has risen rapidly over the past year in an effort to contain sky-high inflation, but the market expects policymakers to start cutting rates before the end of the year. Annual headline inflation fell to 4.9% in April, its lowest in two years, but remains well above the Fed’s 2% target.

At the same time, the labor market remains tight, with unemployment insurance claims remaining near historic lows. Job growth also hit 253,000 in April despite a slowing economy, while the unemployment rate stood at 3.4%, tied for the lowest level since 1969. The average hourly wage rose 0.5% for the month and rose 4.4% from a year ago, both above expected.

Antonucci told CNBC’s “Squawk Box Europe” on Friday that Quintet disagreed with the market pricing of rate cuts later in the year.

“We think this is a hawkish pause – it’s not a hawkish pivot to dovish – it’s a pause, the level of inflation is high, the labor market is tight, and so markets may 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 an unlikely scenario and that’s just the first problem.”

“The second is that the tension here is that if the labor market remains strong, if economic activity doesn’t eventually deteriorate to the point of having an environment of recession and disinflation, the Fed may have to tighten policy more aggressively and then you will have a recession, including an earnings recession,” he added.

“The Fed may need to increase more aggressively if inflation remains elevated.”

Antonucci’s position mirrored messages from some members of the Federal Open Market Committee this week, who reiterated the importance of waiting to monitor the lagged effect of previous rate increases, but also indicated that the data does not justify yet another accommodating pivot.

Cleveland Fed Chair Loretta Mester said on Tuesday the central bank was not yet at the point where it could “hold” rates, while Dallas Fed Chair Lorie Logan suggested on Thursday that the data so far did not justify skipping a rate hike at the June meeting. .

Investors will be watching Fed Chairman Jerome Powell’s speech on Friday closely for clues on the FOMC’s potential trajectory.

“Jerome Powell was particularly critical of the ‘stop and go’ monetary policy of the 1970s which contributed to the stagflationary underpinning of the economy and required aggressive monetary policy to restore price stability,” he said. said Quincy Krosby, chief global strategist at Financière LPL.

“If he mentions this during his speech on Friday, the market could interpret it as a signal that unless the data improves significantly on inflation, he will be pushing for another rate hike. “

Krosby added that the “Fedspeak chorus” of the week served to remind markets that the central bank’s mandate is to restore price stability and that the FOMC is ready to raise rates again to “get the job done if inflation is not cooperating”.