Tai Hui

Macroscope | US inflation, jobs report show Fed can’t just stick to autopilot on interest rate rises

Robust economic data, stubborn inflation, easing fears of a banking crisis and the end of the debt ceiling drama all give the Fed room to raise rates again

Other leading indicators are flashing signs of caution, though, and the Fed must be mindful not to be too aggressive and risk harming the economy

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People eat at a taco restaurant in a New York market on April 12. Recent US inflation figures and other economic data are still showing considerable resilience, highlighting the limited cooling effect of higher interest rates. Photo: AFP

Tai Hui

Published: 9:15pm, 9 Jun 2023

The US Federal Reserve will next meet on June 13-14 to discuss monetary policy. For the first time since the rate-raising cycle began in March 2022, the discussion is likely to revolve around whether to stop raising interest rates.

Economic data, the vulnerability of the banking sector and the US government debt ceiling saga all influence the decision. The Fed could opt to leave rates unchanged – but there is a growing probability that this would just be a pause, rather than the end of the increases.

The Fed Funds futures market, which reflects investors’ expectations of what the central bank will do in the months ahead, has swung wildly in recent weeks. Not only has this indicator shifted on whether rates will rise in the coming months, investors also seem to have changed their minds about whether the Fed will cut rates later this year.

After the May Federal Open Market Committee meeting, the futures market was pricing in the end of the rate-raising cycle. It expected the Fed to start cutting rates in the second half of the year, with a total reduction of 100 basis points by next January. However, as of June 2, the same market pricing is showing an 80 per cent chance of another 25-point rise by the July meeting, with the first cut delayed until December.

What has changed? The troubles surrounding US regional banks seem to have stabilised. This has helped calm investor nerves about a possible banking crisis. Moreover, recent inflation and economic data are still showing considerable resilience.

April’s personal consumption expenditure price index was up 0.4 per cent month on month, showing that the Fed’s inflation concerns are not over yet, especially in the service sector. Employment numbers for May were much stronger than expected, with 339,000 jobs created versus a market expectation of just 195,000. Figures from April were also revised higher.