Divided Fed expected to rally around US interest rate pause

WASHINGTON

The U.S. Federal Reserve is widely expected to pause its campaign of interest rate increases on June 14 to give policymakers more time to assess the economic impact of existing hikes and recent banking stresses.

But members of the rate-setting Federal Open Market Committee (FOMC) remain divided going into the meeting on June 13-14, with a minority still pushing for an 11th straight hike to fight inflation, which remains stubbornly above the Fed’s long-term target of two percent.

The Fed has raised its benchmark lending rate by five percentage points since March last year, lifting it to between 5.00 to 5.25 percent.

Senior officials including Fed chair Jerome Powell have indicated they may vote to hold the benchmark lending rate at the next meeting of the Fed’s powerful rate-setting committee, while leaving the door open to an additional rate hike in July if necessary.

“Skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming,” Fed governor Philip Jefferson said late last month.

The data points to a mixed economic picture, with slowing growth, a tight labor market, and inflation still well above the Fed’s two percent target.

But those pushing for a further hike, like Fed governor Christopher Waller, have indicated support for a more aggressive stance on inflation.

“I do not support stopping rate hikes unless we get clear evidence that inflation is moving down towards our two percent objective,” Waller said last month, adding: “whether we should hike or skip at the June meeting will depend on how the data come in” before the next decision.

The division among members of the FOMC over the best path forward has led some traders on a journey, from predicting a pause to expecting a hike - and back again.

Futures traders who as recently as late May were predicting another hike, now see a more-than 70 percent chance that the Fed will vote to hold rates on Wednesday.

And many analysts now also see a pause as the most likely scenario this week.

While most major banks now predict a pause, there are still some notable outliers who expect the Fed to hike rates by another quarter percentage point.

“We are maintaining our call for a 25bp rate hike next week - though admittedly it is a close call,” Citi economists wrote in a recent investor note.

If Powell does succeed in winning over a majority of FOMC members for a June pause, analysts expect the Fed to signal through its interest-rate announcement and updated summary of economic projections (SEP) that it expects another rate hike to complete the cycle.