Markets keep assuming the Federal Reserve’s next rate hike will be the last
Tiana Lowe Doescher
Video Embed
Although investors are in near unanimous consensus that the Federal Reserve will raise the federal funds rate by a quarter of a percentage point to a range of 5% to 5.25%, only a quarter of futures traders seem to believe the Fed’s next rate hike won’t be the last. While it is possible that the central bank will hold rates above 5% for the rest of the year rather than raising them, the underlying numbers do not back that assumption.
The most obvious indicator that inflation refuses to go in the right direction is core PCE, the Fed’s preferred inflation measure. PCE inflation (excluding those volatile categories of food and energy) rose by 0.3% in March, the same change as in February. Core PCE rose by 4.6% over the 12 months ending in March, and it actually accelerated from the last quarter of 2022 to the first quarter of this year. Core PCE services excluding housing, another closer look used by the Fed, rose by 4.7% over the year ending in March.
HOW FAR INFLATION HAS FALLEN SINCE ITS PEAK — AND HOW MUCH FURTHER IT HAS TO GO
Despite the money supply contracting by 4% over the last year, nominal PCE is $1.8 trillion higher, or some 10% higher, than the pre-pandemic trend. While the labor market has finally slowed somewhat, it remains much too hot for the liking of the Fed, which is unrelenting in its adherence to the Phillips Curve.
While the Summary of Economic Projections published after the Fed’s March meeting found that the Federal Open Market Committee, on average, assumed that the Fed would raise rates only once more and then hold them throughout the rest of the year, seven of the 18 members projected further hikes throughout the year. Since that SEP was released, the numbers have only shown that the situation has stagnated, not improved. It’s possible the Fed will pause after a hike this week, but investors would be wise to consider the obvious: They have prematurely anticipated the Fed’s pivot every month of the last 12 months, and there’s zero sign in the data that they’re getting it right this time.