Fed may be forced to defy market expectations and hike rates: Economist

According to Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank, the Federal Reserve may be forced to defy market expectations and hike rates aggressively again later this year if inflation and tightened labor markets persist.

After a 25 basis point hike to bring the policy rate within the 5% to 5.25% target range earlier in the month, the market sees around a 60% chance that the central bank will pause its monetary tightening cycle at its June meeting according to the CME Group Fed watch tracker of prices in the fed funds futures market.

The Fed has been quick to raise interest rates over the past year in an attempt to curb skyrocketing inflation. However, the market expects policymakers to start cutting rates before the end of the year. Annual headline inflation fell to 4.9% in April, the lowest level in two years but still well above the Fed’s 2% target.

Meanwhile, the labor market remains tight and jobless claims are still close to historically low levels. Despite a slowing economy, job growth also reached 253k in April, while the unemployment rate was 3.4%, its lowest level since 1969. Average hourly earnings rose 0.5% for the month and rose 4.4% year-on-year, both higher than expected.

Antonucci told CNBC’s Squawk Box Europe on Friday that Quintet disagreed with the market’s pricing of rate cuts later in the year.

“We believe this is a hawkish pause – it’s not a move from hawkish to dovish – it’s a pause, inflation is high, the labor market is tight and therefore markets may be disappointed if the Fed doesn’t cut rates .” ” he said.

Given the strength of the job market, Antonucci said that a rate cut “appears to be an implausible scenario and is only the first problem.”

“The second reason is that the tension here is that if the labor market remains strong and economic activity does not eventually deteriorate to the point where a recessionary environment and disinflation occurs, and then the Fed may need to tighten policy more aggressively have you done a recession, including an earnings recession,” he added.

“The Fed may need to raise rates more aggressively if inflation remains elevated.”

Antonucci’s position echoed messages from some members of the US Federal Open Market Committee this week, who reiterated the importance of waiting for the delayed effects of previous rate hikes, but also noted that the data does not yet warrant a dovish stance.

Cleveland Fed Chair Loretta Mester said Tuesday that the central bank is not yet at the point where it can “hold” interest rates, while Dallas Fed Chair Lorie Logan hinted on Thursday that past rates have Data does not justify not raising rates at June meeting.

Investors will be watching Fed Chair Jerome Powell’s speech on Friday for clues as to where the FOMC might be headed.

“Jerome Powell was particularly critical of the ‘stop-and-go’ monetary policy of the 1970s, which contributed to the stagflationary foundation of the economy and required aggressive monetary policy to restore price stability,” said Quincy Krosby, chief global strategist at LPL Finance .

“If he mentions this in his speech on Friday, the market could take it as a signal that he will endorse another rate hike unless inflation data improves significantly.”

Krosby added that this week’s “Fedspeak chorus” served to remind markets that the central bank’s mandate is to restore price stability and that the FOMC is poised to hike rates again to “prevent the… job to do if inflation doesn’t cooperate.”