Data showing U.S. inflation stuck in the 4%-5% range and consumer spending coming in stronger than expected for last month are boosting the likelihood of another Federal Reserve rate hike in June.
As of late Friday afternoon, after the release of April’s personal consumption expenditures index, fed funds futures traders saw a 66.5% likelihood that the Federal Reserve will lift rates by another quarter of a percentage point in June. That’s up from 51.7% a day ago, and would take the Fed’s main benchmark rate target to between 5.25%-5.5% next month, according to the CME FedWatch Tool.
Financial-market players have been considered the possibility that the U.S. economy is more resilient than thought — that is, less prone to contracting and less sensitive to higher interest rates — even after more than a year of Fed rate hikes. Peter Essele, head of portfolio management at Commonwealth Financial Network, said the PCE report “puts a June hike back in play, perhaps even greater than a quarter percent hike in a last-ditch effort by the Fed to put out the inflationary fire once and for all.”
“The upside surprise to April PCE inflation and strong household spending are stark reminders to markets that, once the debt-ceiling drama fades, the economy is still too hot for the Fed,” said Chris Low, chief economist for FHN Financial in New York.
In a note released earlier on Friday, Low said that “trading is choppy now — not surprising until Congress and the President actually raise the debt ceiling — but market expectations are entertaining a 25 basis point June hike as a real possibility compared to even a week ago.”
Meanwhile, fed funds futures traders saw a 54.2% likelihood of a pause in July, with the remaining 45.8% being split between the chances of another quarter-point hike or a rate cut two months from now. Traders also dialed back on their expectations for rate cuts through December.
The policy-sensitive 2-year Treasury yield TMUBMUSD02Y, 4.563% jumped 7.9 basis points to 4.587% after Friday’s PCE report, rising for a 12th straight session and extending its longest streak of advances since January 2018. All three major U.S. stock indexes DJIA, +1.00% SPX, +1.30% COMP, +2.19% finished with solid gains as investors focused for much of the day on reports of possible progress in U.S. debt-ceiling talks.