December 6, 2023

Traders react as Federal Reserve Chairman Jerome Powell speaks from a screen at the New York Stock Exchange (NYSE) on May 3, 2023.

Brendan McDermid | Reuters

Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank, said the Fed could defy market expectations by raising rates aggressively again later this year if inflation remains high and the labor market tightens.

Markets are pricing in about a 60% chance the Fed will pause its monetary tightening cycle at its June meeting, based on a 25 basis point hike earlier this month that took the federal funds rate to a target range of 5% to 5.25%.CME’s Fed Watch Tracker The price of the fed funds futures market.

The Federal Reserve has been raising interest rates rapidly over the past year to curb high inflation, but markets expect policymakers to start cutting rates before the end of the year. Annual headline inflation fell to 4.9% in April, the lowest in two years but still well above the Fed’s 2% target.

Meanwhile, the labor market remains tight, with jobless claims remaining near record lows. Job growth also came in at 253,000 in April despite the slowing economy, while the unemployment rate was 3.4%, the lowest since 1969. Average hourly earnings rose 0.5% in the month and 4.4% year-on-year, both higher than expected.

Antonucci said on CNBC’s “Squawk Box Europe” on Friday that Quintet disagrees with the market pricing in a rate cut later this year.

“We think this is a hawkish pause — it’s not a hawkish to dovish shift — it’s a pause, inflation is high, the labor market is tight, so markets could be disappointed if the Fed doesn’t cut rates,” he said.

The Fed may have to tighten monetary policy more aggressively if inflation remains high, economists say

Given the strength in the labor market, Antonucci said a rate cut “seems unlikely, and that’s just the first question.”

“The second is, the tension here is that if the labor market remains strong, if economic activity doesn’t end up deteriorating to the point where there’s a recessionary environment and deflation, the Fed may have to tighten policy more aggressively, and then you’ll have Recessions, including earnings recessions,” he added.

“If inflation remains high, the Fed may need to be more aggressive in raising rates.”

Antonucci’s stance mirrored a message from some FOMC members this week, who reiterated the importance of waiting to monitor the lagged effects of previous rate hikes, but also said the data had not yet justified a dovish turn.

Cleveland Fed President Loretta Mester said on Tuesday that the central bank has not yet reached a point where it can “maintain” interest rates, while Dallas Fed President Lori Logan said on Thursday that current data does not justify an increase in interest rates in June. It is reasonable not to raise interest rates at the monthly meeting.

Investors will be closely watching speeches by Federal Reserve Chairman Jerome Powell on Friday for clues about the FOMC’s potential trajectory.

“Jerome Powell was particularly critical of ‘stop-and-go’ monetary policy in the 1970s, which led to a stagflationary underpinning of the economy that required aggressive monetary policy to restore price stability,” said Quincy Crosby, chief global strategist. explain. LPL Finance.

“If he mentions this when he speaks on Friday, the market may interpret that as a signal that unless inflation data improves significantly, he will advocate for another rate hike.”

Crosby added that this week’s “chorus of Fed speeches” reminded markets that the central bank’s job is to restore price stability and that the FOMC is poised to raise rates again to “get the job done when inflation doesn’t cooperate.”