Traders in Federal funds futures are now pricing in a nearly 70% chance of a 25 basis point rate hike by the Federal Reserve at its meeting in May. After the release of the March labor report, the probability of a rate rise increased from 49.2% to 67.4%, according to CME’s FedWatch tool.
Analysts say that the strong labor market data from March will likely give the Fed the confidence to raise interest rates in May. The US economy created 236,000 jobs in the month, a number just shy of the 238,000 median estimate from economists polled by The Wall Street Journal.
In addition to the labor market growth, average hourly earnings for private-sector employees slowed to a 5.5% YoY growth, the slowest pace in a year. A rate hike could help combat rising inflationary pressures, which currently sits at 4.1% YoY, a figure that is expected to cross the Fed’s 2% target in the coming months.
With the labor market continuing to show signs of strength and inflationary pressures rising, it seems likely that the Federal Reserve will make a move to raise interest rates in May, following their recent rate increase in March.
The market’s focus, however, remains primarily on the inflation situation, as this will be the key factor in determining the pace of subsequent rate hikes. In particular, investors will be watching the timing of when the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, moves above 2%.
Despite the labor market’s strength, there are still concerns about the pace of wage growth, which has remained stubbornly low even as unemployment has reached a 17-year low. Some analysts have suggested that the lack of wage growth could be due to the fact that firms are holding back on raising wages amidst the uncertainty surrounding the global trade environment.
Furthermore, the jobs market could be impacted by geopolitical tensions, which appear to be on the rise. With the current trajectory of US-China trade relations and events in the Middle East, it’s possible that businesses may exercise caution in their hiring plans.
Although the market appears to be pricing in a near 70% chance of a rate hike in May at present, the situation could still change based on new economic and geopolitical developments. A shift in labor market conditions, inflationary pressures, or global trade relations could all influence the decision on whether or not the Federal Reserve chooses to raise interest rates.
Aside from the possibility of a rate hike in May, some analysts are also eyeing potential changes to the Fed’s policy framework, as well as any adjustments to its plans for reducing its $4.5tn balance sheet. With new Federal Reserve Chairman Jerome Powell now at the helm, some are predicting a shift in approach to monetary policy and a possible acceleration in the unwinding of the quantitative easing program.
With so much uncertainty surrounding the trajectory of the economy, the labor market, and global relations, it’s worth remembering that the Fed’s primary mandate is the maintenance of price stability and maximum employment. It is with these objectives in mind that any potential rate hikes or changes to monetary policy will be made.
In conclusion, while current data suggests a strong chance of a rate hike in May, it’s important to keep an eye on the ongoing economic and geopolitical factors that could influence the Federal Reserve’s decision-making process. As always, investors should remain cautious and be prepared for potential shifts in market sentiment as events unfold.