Fed Officials Signal More Rate Hikes Despite Market Skepticism

According to Cleveland Fed President Loretta Mester, rates are likely to move higher and remain elevated for some time as the Fed continues its fight against inflation.?Despite the recent volatility in the banking sector and the market’s belief the Fed is done, the Cleveland Fed President suggested rates are likely to move higher from here with the improvement in inflation – or lack thereof – dictating exactly how much higher rates will go.?

?

"In my model projection, to put inflation on a sustained downward projection to 2% and to keep inflation expectations anchored, monetary policy moves somewhat further into restrictive territory this year with the fed funds rate moving above 5% and the real fed funds rate staying in positive territory for some time,"?she said.?“Precisely how much higher the federal funds rate will need to go from here and for how long policy will need to remain restrictive will depend on how much inflation and inflation expectations are moving down."?

??

Also speaking yesterday, Boston Fed President Susan Collins said given the recent banking crisis, she has not adjusted higher – or lower – her expectations for rates. Emphasizing the likely tightening in credit, Collins suggested an adjustment in organic credit conditions could do some of the Fed’s work, limiting the need to raise rates as high as previously expected. That being said,?Collins was clear she anticipates still a further backup in rates, just not as high as before the collapse of Silicon Valley Bank.?

?

“In terms of my perspective, I think there are many things that are important. Let me highlight two. One is that a holistic look at the data before each meeting, not making decisions in advance is really important. And following through on our commitment to bringing inflation down, given the costs and the toll that I just mentioned is really important,”?Collins said speaking to NPR’s Marketplace.

?

St. Louis Fed President James Bullard also spoke this week to Bloomberg Television. According to Bullard, the recent turmoil in financial markets does not signal a need for a more benign approach to policy and in fact, given the level of inflation, Bullard said he has increased his expectations for rates.?“You can walk and chew gum at the same time…You’ve got the macroprudential tools for financial stress and you’ve got monetary policy to fight inflation,”?he said.

?

The latest Fed comments come as the debate continues over whether or not the Fed will move forward with additional rate hikes or move to the sideline after raising rates 475bps in 12 months, the fastest pace of ascent since the 1980s. Of course, given the still elevated level of inflation, the still modest pace of activity in the domestic economy and the apparent?“calm”?that has returned to the markets, the Fed may be wise to take advantage of the opportunity of such relatively favorable conditions which suggest households and businesses can – at least for now – withstand a further backup in rates.

?

According to the CME FedWatch Tool, the probability of a 25bp May rate hike is currently at 35%, while the probability of holding steady at the current range is at 65%.

?

Yesterday, the number of job openings according to JOLTS – the Job Openings and Labor Turnover Survey – declined from 10.6M to 9.9M in February, the lowest since May 2021. According to the median estimate on?Bloomberg, the number of job openings was expected to drop to 10.5M.

?

Also yesterday, factory orders declined 0.7% in February, surpassing the 0.5% decrease expected and following a 2.1% drop at the start of the year.

This morning, MBA mortgage applications declined 4.1% in the week ending March 31 following a 2.9% gain the week prior. The 30-year mortgage rate, meanwhile, declined 5bps to 6.40%, a seven-week low.

?

Also this morning, ADP reported that private sector employment rose by 145k in March, falling short of the 210k gain expected and the weakest pace of job creation since January.

?

Additionally this morning, the trade deficit widened for the third consecutive month, widening 2.7% from -$68.7b to -$70.5b in February. According to the median forecast, the deficit was expected to widen to -$68.8b. The value of imports declined 1.5% to $321.7b, while exports dropped 2.7% to $251.2b.

?

Later this morning, we will have a look at the service sector with the non-manufacturing ISM report released for March. While seemingly more resilient than manufacturing as consumers increasingly swap goods or retail consumption for services or experimental purchases, with consumption slowing nominally, despite resilience at the start of the year, service-sector activity is also showing further signs of fatigue.

?

Tomorrow, initial jobless claims are expected to tick up from 198k to 200k in the week ending April 1.

?

The key labor market report, however, comes on Friday with March nonfarm payrolls. Last month, nonfarm payrolls rose by 311k in February, surpassing the 225k gain expected, and following a 504k increase in January.

?

In March, payrolls are expected to rise by 240k. While marking the second consecutive month of waning momentum, nominally job creation remains solid as the Fed describes it. The unemployment rate, meanwhile, is expected to remain steady at 3.6% in March after unexpectedly ticking up from 3.4% to 3.6% last month.

?

Average hourly earnings are expected to rise 0.3% in March and 4.3% year-over-year, down slightly from the 4.6% gain in February. While somewhat volatile month to month, broadly speaking wage growth has been steady in a range of 4.0% to 5.9% for the better part of the past two years.?

?

?-Lindsey Piegza, Ph.D., Chief Economist?