- Equity and bond markets are betting that the Fed will pause rate hikes, the most aggressive monetary policy since the 1980s, at this week’s Federal Open Market Committee meeting.
- Former Fed Vice Chairman Roger Ferguson told CNBC that the Fed’s decision is a much closer call than the market expected, and will be followed by another central bank rate hike to keep inflation in check. said he was thinking of
- Investors should be prepared for the Fed to “continue to raise rates,” he said.
Traders are suggesting a moratorium on rate hikes. Most likely result This comes as some strategists say a new bull market is underway. The Dow Jones Industrial Average posted three consecutive session wins until the end of last week, the Nasdaq Composite Index posted its sixth straight week of positive gains for the first time since November 2019, and all major indexes moved 50 and 200 days. finished above. Friday average.
“The bear market is officially over,” Bank of America equity strategist Savita Subramanian recently said, noting that the S&P 500 index is up 20% above its October 2022 low. rice field.
Some question the call for a new bull market because of how narrow the market’s lead is — a handful of the biggest tech stocks are responsible for much of the recovery in market indices. Some people But there is another important reason investors should not be overconfident. Even if the Fed decides to stop when it releases its latest FOMC decision on Wednesday, it is certain that the Fed will make a long-term policy shift in a period of its most aggressive monetary policy since the 1980s. No, it’s not guaranteed.
Former Federal Reserve Vice Chairman Roger Ferguson said:
Last month, the Fed approved its 10th rate hike in a little over a year, the quickest tightening policy any central bank has undertaken since the 1980s, and not just for stock and bond markets, but for the economy as well. It also had a big impact on consumers. . The Fed removed language in its May FOMC meeting statement about the need for “additional policy enhancements” to meet its inflation target. This maintained the market majority’s view that a moratorium would be announced this week.
But Ferguson remains unconvinced.
“I think a pause here is really closer than the market is currently expecting,” he said in an interview with CNBC’s “Squawkbox” show on Friday. And even if the Fed were to pause, Ferguson said, that doesn’t mean it won’t raise rates further this year.
“Markets should be prepared for the Fed to continue raising rates, even if this is a pause,” Ferguson said.
He’s not the only one who thinks the Fed’s hiatus won’t last long. In an interview with CNBC’s senior economics correspondent Steve Reisman last week, NatWest Markets U.S. head Michel Girard said, “The Fed will end up skipping this month, but it’s gearing up for action in July.” I think we will be ready,” he said.
According to former Atlanta Fed President Dennis Lockhart, a pause is very likely. However, he said in an interview with CNBC’s Closing Bell Overtime that inflation will continue to be a problem for the Fed. Referring to the Fed’s goal of restoring inflation, Lockhart said, “We are seeing some signs of a decline in inflation, but it is very gradual. There is still a big challenge for the Commission, especially with regard to the 2% target. I think there is,” he said. In the long term, it will be reduced to a target range of 2%.
On an annualized basis, inflation was 4.9% in April, slightly below market expectations, but as seen in economy-wide prices and as inflation rises, many CEOs are on record. As expected, the situation is still “tenacious”. Persist. This week will include an update on annual and monthly inflation trends following the May CPI report due on Tuesday, the first day of the Fed’s two-day FOMC meeting.
Traders react to Federal Reserve Chairman Jerome Powell speaking on the floor of the New York Stock Exchange (NYSE) on May 3, 2023.
Brendan McDiarmid | Reuters
Continuing concerns over inflation are among the factors that make Ferguson more likely to see a rate hike on Tuesday. This view is supported, among other things, by the continued tight labor market. Wage growth is slowing and unemployment is rising. But Ferguson said there are about 1.7 to 1.8 jobs for every unemployed person, which is well above the norm. Wages continue to rise, not only according to recent national data, but also according to an anecdote Mr. Ferguson heard from the CEO. Ferguson serves on the boards of several large companies, including Alphabet and Corning.
“Overall, I think inflation and inflationary pressures are higher and more persistent than the 2% target the Fed has been targeting. I think it’s data that already exists,” he said.
Some see the recent weakness in the labor market as a signal that the Fed may soon need to ease its rate hike strategy. Wharton University professor Jeremy Siegel recently told CNBC that while the Fed has made a strong commitment to lowering inflation, the central bank’s mandate is a dual imperative of achieving target inflation and promoting maximum employment. said. Historically, the unemployment rate has remained extremely low at less than 4%, but unemployment claims recently reached their highest level since October 2021.
“I’m talking about trends here,” Siegel said.
Siegel said the Fed could be “as aggressive and hawkish as it has been” with unemployment not picking up as much and workers remaining confident in the outlook for the job market. rice field. There are some signs that worker confidence is waning. According to the latest Consumer Confidence Index released by The Conference Board, consumers’ assessment of the current employment situation is: ‘Most significant deterioration’ In consumer sentiment data tracked by the company, labor economists told CNBC in May that the latest labor market data, taken together, could allow the central bank to make a soft landing for the economy. He said he supported Fed Chairman Powell’s view.
“There is nothing to suggest that we are not in a soft landing scenario,” said Lucha Vancudre, senior economist at labor market consultant Rightcast, in a recent interview after May’s nonfarm payrolls report. said. “I wouldn’t be surprised if the Fed decided to keep rates on hold. All indicators point to the economy heading in the right direction,” he said.
Nick Bunker, director of economic research at Indeed Hiring Lab, says all recent data points are broadly in line with the soft landing hypothesis. “Overall, the labor market is cooling in a sustainable way, with signs of moderation, but not too many red flags,” Bunker said.
But there’s an old adage on Wall Street that when a recession hits, the job market is the last to know.
“Let me just say one thing,” Siegel told CNBC. “If we get a negative job report within the next month or two, it will make headlines for the first time since COVID-19. And people will say, ‘Oh, I’m sure. ‘And I think that’s going to affect politics and put pressure on the Fed over there, and they’ll say, ‘OK, maybe inflation will get better.’ No.”
Goldman Sachs recently downgraded the House’s view on the likelihood of the U.S. economy slipping into recession, but the firm’s chief executive David Solomon (who remains confident inflation will continue to rise) and Ferguson He remains unsure how future Fed decisions will shape the economic outlook. Solomon said at the recent CNBC CEO Council Summit that “some structural things are happening” related to inflation that will make it difficult for the Fed to “easily” return to its 2% target, even if the Fed He said it would be based on its current view, even if it was paused. The economy isn’t expecting a rate cut by the end of the year, and bond traders are betting on that outcome.
Ferguson worries that high inflation could force the Fed to raise rates to levels that would effectively push the U.S. into recession. “I still think a recession is a real possibility,” Ferguson said. “My expectations are short and shallow, but we’ll see.
Former Fed governor Frederick Mishkin also shares concerns about inflation and believes the Fed’s appropriate policy is not to suspend in June.
“I can understand why [the Fed] you might want [pause]”It wouldn’t be terrible if it happened,” Mishkin said in a recent CNBC interview, adding, “But the inflation numbers are still high and it’s very hard to see a drop towards the 2% target.” I think it’s too late,” he said.
Mishkin said he was more concerned about underlying inflation, a reliable number for predicting future inflation paths. “The economy and labor market are still strong, and although there is some easing, there is a long way to go to contain inflationary pressures, so the Fed will have to raise rates, and it would be better to do it now. “I think it’s to show a strong determination to keep inflation under control,” he said.
Ferguson said the moratorium was unlikely to have a material negative impact on the economy, even if it required a subsequent rate hike, citing the Bank of Canada and the Reserve Bank of Australia as examples of “early moratoriumers.” rice field. “We both paused, but are now back in the hiking process,” he said.