Fed minutes suggest a rate hike pause in June

The US Federal Reserve will likely pause rate hikes next month, which markets will welcome.

Earlier in May, US central bank officials were divided on whether to continue rate hikes at the upcoming June meeting, as per the minutes of the May 2-3 meeting published on Wednesday.

Indeed, the minutes stated: “Several [policymakers] noted if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary.”

However, “almost all” policymakers also saw upside inflation risks and “many participants focused on the need to retain optionality” to hold rates or hike. 

Moreover, “some participants stressed that it was crucial” not to communicate that rate cuts are likely, or that additional hikes in borrowing costs “had been ruled out.” 

“Whether we should hike or skip at the June meeting will depend on how the data come in over the next three weeks,” according to Fed Governor Christopher Waller on Wednesday.

“Between now and then, we need to maintain flexibility on the best decision to take in June,” he added.

As I was quoted by Financial MirrorValue WalkInvestor IdeasBusiness Today, and Money Mozo, amongst other media, even though officials were in agreement that inflation was still ‘unacceptably high’, when the Federal Reserve says it ‘may not be necessary,’ this indicates a pause. Furthermore, the word ‘several’ suggests a majority. 

Also, Fed Chair Jerome Powell signalled last week that he and officials were open to supporting a pause in hikes at the June meeting. 

They also said that a debt default threatens tighter financial conditions, and a mild recession could hit later in the year, which would indicate they are opting for a pause in the hiking cycle. 

Some Fed officials said failing to increase the debt ceiling threatens “significant disruptions to the financial system and tighter financial conditions that weaken the economy.” Whilst “a number” of officials said the Fed “should maintain readiness to use its liquidity tools” to avoid the impact of a potential default. 

As I talked about on CNBC Africa on Wednesday, although a degree of progress has been made within the US debt ceiling negotiations, several issues are still unresolved, according to House Speaker Kevin McCarthy on Thursday, as the deadline moves closer on raising the federal government’s $31.4 trillion borrowing limit or risk default.

Going back to rates, I am of the opinion that keeping them unchanged for the first time since early last year – which standing at 5-52.5%, is the highest since 2006 – will be welcomed by markets.

Indeed, they will be bolstered as it appears the end of rate hikes is nearer. Nevertheless, if this were to happen, investors should remember this would not yet be a pivot; it would be a hawkish pause.

To my mind, the Fed would be right to opt for a pause for three key reasons.

First, the US financial system is far from over. After a series of bank failures, there are serious concerns remaining, and there may be more to come.

The chaos stemming from the banking crisis is resulting in a decline in bank lending and tightening credit conditions for households and businesses. This will subsequently lead to a slowdown in economic activity and hiring.

The US central bank’s hiking stance has tightened financial conditions, which has contributed to the banking crisis, and of course, now the crisis will pressure financial conditions further.

Second, the monetary policies’ time lag is lengthy. It takes around 18 months to two years for the full effect of rate hikes to filter into the economy.

And third, the bond market is indicating a long and/or deep recession with its inverted yield curve. Yields are inversely related to bond prices. Indeed, this is usually an indication of a looming recession, as an inverted yield curve has come about around a year before almost all recessions since 1960.

As such, we hope the Federal Reserve will pause rate hikes at the June meeting with the aim of starting to slash rates later this year.

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