Fed Officials Pushed Back on June Hike Ahead of Friday’s Critical NFPs

  • USDOLLAR
    (${instrument.percentChange}%)

Fed Uncertainty

The US Federal Reserve had hinted to pause of its year-long rate hiking cycle at the beginning of May, based on the cumulative and lagging effect of its action, as well as the expected contraction in credit conditions from the recent banking turmoil.

This credit tightening however, has not been that significant so far and is mostly a product of the Fed's rate increases, not the financial stress. Many Fed officials have alluded to that, such as Ms Logan (voter) a couple of weeks back [1], while Fed of Kansas City said noted that financial stress "may be less effective in reducing inflation" than monetary constraint. [2]

Even though it has been cooling, inflation remains elevated and far from the central bank's 2% target. Core readings have been particularly sticky for a while now and last week's PCE report showed an uptick in April. More importantly, headline PCE accelerated 4.4% y/y (from 4.2% previously), in the first increase since June's multi-decade peak. Furthermore, the labor market remains very tight, with elevated wages and unemployment at five-decade lows.

These indicators call for sustained restrictive monetary stance and markets have been moderating their hopes for an end to the tightening cycle and multiple rate cuts. The hot PCE inflation report accelerated this shift and markets had come to price in another hike in June.

On Wednesday however, we got dovish comments from two Fed voters, who pushed back against such outcome. Mr Jefferson noted that "skipping a rate hike" in the next meeting would allow policymakers to assess more data before deciding on further tightening. He emphasized however that such a hold, "should not be interpreted to mean" that rates have peaked [3]. In the same vein, Mr Harker advocated in favor of skipping an increase, but stressed that this is "not pause". He warned though, that upcoming labor and CPI data "may change my mind". [4]

These remarks point to divisions amongst policymakers, which were also evident in the accounts of the last decision and to increased uncertainty around the next move. The Fed is not alone in this and I had recently argued that central banks are all over the place.

More importantly, this latest commentary sparked another repricing around the Fed's policy path, this time on the dovish side. CME's now assigns the highest probability to rates staying unchanged at the June meeting, but still prices in one more hike. [5]

The USDOLLAR dropped after these remarks and the new shift in expectations. Focus now turns to Friday's Employment Report, which will be critical for the central bank's next move. Another strong print could make it hard for officials to stay in the sidelines, but weak result could reinforce the case for a hold.

The House of Representatives meanwhile, passed the Fiscal Responsibility Act of 2023, ahead of the June 5 estimated deadline, after which the US government is projected to become unable to pay all of its obligations. The bill needs to also clear the Senate. A successful outcome could enable the Fed to pursue a more aggressive monetary approach.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 31 May 2023 https://www.dallasfed.org/news/speeches/logan/2023/lkl230518

2

Retrieved 31 May 2023 https://www.kansascityfed.org/research/economic-bulletin/financial-stress-may-do-relatively-little-to-reduce-inflation/

3

Retrieved 31 May 2023 https://www.federalreserve.gov/newsevents/speech/jefferson20230531a.htm

4

Retrieved 31 May 2023 https://www.youtube.com/watch

5

Retrieved 21 Jun 2024 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

${getInstrumentData.name} / ${getInstrumentData.ticker} /

Exchange: ${getInstrumentData.exchange}

${getInstrumentData.bid} ${getInstrumentData.divCcy} ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%) ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%)

${getInstrumentData.oneYearLow} 52/wk Range ${getInstrumentData.oneYearHigh}
Disclosure

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Past Performance: Past Performance is not an indicator of future results.

Spreads Widget: When static spreads are displayed, the figures reflect a time-stamped snapshot as of when the market closes. Spreads are variable and are subject to delay. Single Share prices are subject to a 15 minute delay. The spread figures are for informational purposes only. FXCM is not liable for errors, omissions or delays, or for actions relying on this information.