In a whirlwind of contradictory statements, key figures within the Federal Reserve have sparked a frenzy of speculation about the future of interest rates. On Friday, Fed Chair Jerome Powell’s cautiously dovish remarks provided some relief to the market, suggesting that the central bank could adopt a more patient approach in assessing inflation and the subsequent course of action. Powell’s emphasis on data-driven decision-making presented a stark contrast to earlier pronouncements made by his colleagues.
One such dissenting voice came from Fed member Raphael Bostic, who, in an interview with CNBC earlier in the week, argued against rate cuts even in the face of a potential recession. Today, a barrage of opinions from various Fed officials, including Bostic, James Bullard, Mary Daly, and Neel Kashkari, further intensified the divide, revealing a lack of consensus on the best course of action for the upcoming meeting.
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Kashkari, for instance, described the decision as a “close call,” contemplating the merits of pausing or raising rates in June. He emphasized that a pause should not be misconstrued as an end to the rate-hiking cycle and expressed apprehension regarding lingering banking vulnerabilities. Bullard, on the other hand, cautioned that if inflation remained uncontrolled, the Fed would need to take more decisive action, erring on the side of “doing more.” In a surprising departure from market expectations, Bullard even hinted at the possibility of two additional rate hikes this year.
Bostic echoed his previous sentiment by supporting a pause in June, underscoring the time lag inherent in the Fed’s policy mechanisms and the emergence of tightening conditions. He further noted that barring significant changes, a wait-and-see approach would be prudent. Notably, Bostic maintained his position against rate cuts throughout 2023, emphasizing his unwavering conviction in the Fed’s stance.
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Daly, however, opted to remain tight-lipped about the June meeting, dismissing attempts to predict Fed policy as distracting. She highlighted the importance of gathering more data before making any conclusive decisions.
As a result of these conflicting views, futures tied to the Fed funds rate have experienced significant repricing. The odds of a pause at the June 14th meeting have surged to 87%, a notable increase from the previous week’s 80%. Simultaneously, the market now perceives a 13% likelihood of a 25 basis points rate hike, further reflecting the uncertain terrain ahead.