SUMMARY
- Stubborn inflation and strong labor market might compel the U.S. Federal Reserve to reconsider its monetary policy trajectory.
- Despite speculation of a pause in the monetary tightening cycle, there's a possibility of more aggressive rate hikes.
- As market participants anticipate Jerome Powell's speech, the Federal Open Market Committee stresses the importance of monitoring the effects of previous rate hikes.
The U.S. Federal Reserve faces a potential turning point. Amid persistent inflationary pressure and an unwaveringly robust labor market, it might have to reconsider its monetary policy trajectory and adopt a more aggressive stance. This prediction comes from Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank, who disputes the general market sentiment that hints at a more dovish outlook.
Recently, the Federal Reserve raised the fed funds rate into the 5%-5.25% target range by 25 basis points, an action which was quickly followed by speculation of a potential pause in the monetary tightening cycle at its June meeting. This speculation stems from CME Group’s Fed Watch tracker, which reveals a 60% probability of this pause, as inferred from prices in the fed funds futures market.
While the Federal Reserve has been diligently increasing rates in the past year to curtail rampant inflation, market observers anticipate a shift towards rate reduction before the year ends. Despite headline inflation recently hitting its two-year low at 4.9%, it remains significantly above the Fed's 2% benchmark. Concurrently, the labor market remains resolute, with unemployment and jobless claims nearing historic lows and wage growth outpacing expectations.
Antonucci voiced his skepticism of the market's anticipated rate cuts later this year during an appearance on CNBC's "Squawk Box Europe". According to him, rather than a shift from hawkish to dovish, this is merely a pause in the current policy trajectory. The level of inflation and the strength of the labor market could lead to market disappointment if the Fed decides not to lower rates, he warned.
Reinforcing Antonucci's standpoint, some members of the Federal Open Market Committee this week emphasized the necessity of monitoring the delayed effects of previous rate hikes before adopting a more dovish pivot. All eyes are now on Fed Chairman Jerome Powell as market participants eagerly await his speech for any potential hints regarding the FOMC's trajectory.
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