For the past few months it has been speculated that the Federal Reserve will likely pause rate hikes before summer 2023, and then begin to cut interest rates in 2024. But new data suggests that the Fed may have to continue to raise rates even longer.
Stronger-than-expected U.S. jobs figures and gross domestic product data point to a signficant risk of the Fed taking its foot off the brakes. Sticky core inflation, tight labor markets and a surprisingly resilient economy are leading some economists to reassess their calls to pause rate hikes.
Headline U.S. consumer price index has cooled signficantly since its peak over 9% in June 2022, falling to 4.9% in April. While that is a move in the right direction, it still remains well above the Fed’s target of 2%. Core CPI remains even higher at 5.5% for April.
Data also suggests that the jobs market is much stronger than what the Fed is looking for to signal that it’s time to pause rate hikes. Unemployment remains at 3.4% for April 2023, with the U.S. economy adding 253,000 jobs in April. Normally that would be really good, except for when the Fed is trying to slow the economy down. Numbers like that suggest that the economy is no where near what is needed to convince the Fed that it’s time to pause rate hikes.
Minutes from the last Fed meeting showed that some members still see the need for additional rises. Fed officials including St. Louis Fed President James Bullard and Minneapolis Fed President Neel Kashkari have recently indicated that the Fed may have to continue to raise rates due to high sticky core inflation.
Contining to raise rates puts even more pressure on the banking industry, however. The more the Fed raises rates, the more banks are going to collapse.
The Fed is scheduled to meet again on June 14th.
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