Reply To: Traders Market Weekly: Inflation, Banker Risk with Fed, ECB and BoJ


Interesting Note from Scotia Bank on Fed

A key issue overhanging global financial markets is whether the Federal Reserve is done hiking the fed funds policy rate. As the FOMC goes into communications blackout, we are unlikely to receive any further guidance from key Federal Reserve officials on what to expect into the June 14th decision unless they do so via preferred media outlets during blackout which they have done in the past. The likely silence will keep markets in limbo after a strong payrolls report that keeps the door open to further tightening. The next test may be US CPI on day 1 of the two-day June FOMC meeting.

The core case for the Fed to be done hangs on interpretations of Fed-speak starting with Chair Powell’s May 19th remarks and culminating in this past week’s comments by other officials. Some have taken the suite of those remarks—and particularly the Chair’s—as a clear sign they will pause in June. That may be applying too much literary licence to what they actually said.

Recall that on the 19th, Powell said the following:

“Having come this far, we can afford to look at the data and the evolving outlook to make careful assessments.”

He also noted that no decision had been made about the June meeting’s outcome and that they will take decisions one at a time depending upon the evolution of data and events like the debt ceiling agreement’s passage since those remarks were offered. What I heard the Fed chair say is quite literally that they will “look at the data” which to me sounds more like a shift away from providing explicit advance guidance that they will definitely hike toward taking it one meeting at a time. After getting another very strong payrolls report (here), it’s now onto core CPI.

On that note, the Cleveland Fed’s core CPI ‘nowcast’ is leaning toward another hot print for May of about 0.5% m/m SA (chart 1). Should core CPI turn in a hot performance then it may be difficult for the FOMC to resist another hike. Also bear in mind that when Chair Powell spoke he was concerned about political developments around the debt ceiling and the risk of market dysfunction that has now been swept aside by the highly predictable passage of the agreement in both chambers of Congress.

Markets also took comments from Governor—soon to be Vice Chair—Jefferson as supportive of a June pause. Funny, but here too what I heard him say doesn’t match the market narrative. Jefferson said:

“A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle.”

Note the difference between signalling a potential pause “at a coming meeting” versus, say, “at the next meeting” or “soon” which would have been a June pause signal consistent with language they’ve tended to use to communicate a greater sense of urgency.

This coming week will offer plenty of time for markets to consider these matters absent much by way of US calendar-based developments. For that matter, we can say the same about much of the world with the exception of the week’s strong focus upon Canada.–2023.html