US Rate Futures Expect Fed Pause in June in Sharp Turnaround From Earlier
U.S. rate futures on Wednesday priced in a pause in interest rate hikes by the Federal Reserve at next month’s monetary policy meeting, a massive turnaround from indications of a 25 basis-point increase earlier in the session, according to Refinitiv’s FedWatch.
The big catalyst were comments from Fed Governor and vice chair nominee Philip Jefferson and Philadelphia Fed President Fed Harker who both touted skipping a June rate hike.
Jefferson said “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.”
Harker echoed the same sentiment. “I am in the camp increasingly coming into this meeting thinking that we really should skip,” Harker said at an event on financial stability. That said, data due on Friday about the U.S. job market “may change my mind.”
Following their comment, fed funds futures have factored in a 70% chance the Fed will keep rates unchanged next month, up sharply from a 30% probability earlier in the wake of data showing an increase in U.S. job openings.
The Labor Department reported on Wednesday that U.S. job openings unexpectedly rose in April and data for the prior month was revised higher, pointing to persistent strength in the labor market.
The Job Openings and Labor Turnover Survey, or JOLTS report, also showed layoffs declined significantly last month. There were 1.8 job openings for every unemployed person in April, up from 1.7 in March, and well above the 1.0-1.2 range viewed as consistent with a jobs market that is not generating too much inflation.
After the JOLTS report, rate futures had priced in a nearly 70% chance of a rate increase next month.
“We have been suggesting that they (the Fed) stop,” said Ellis Phifer, managing director, fixed income capital markets at Raymond James in Memphis, Tennessee.
“But they are still so nervous of not signaling that they are done. Even though inflation is still high, it seems to be easing. Some things seem like a little bit loose and so if the Fed is going to be on pause, it’s time. They need to let some of this data work through.”
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.