Hike, hold or skip?

Federal Reserve officials are sounding increasingly split over whether to raise interest rates at their meeting next month or pause their credit tightening campaign. A compromise some have suggested: a skip, where they put off a rate increase next month only to return to it at their following meeting in July.

In contrasting remarks Thursday, Governor Philip Jefferson outlined the dovish case for patience while Dallas Fed chief Lorie Logan suggested that she’s not ready to call a halt to the Fed’s tightening campaign.

An option she floated: Skipping action next month.

“The data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet,” Logan told bankers in San Antonio, pointing to elevated core inflation.

Investors lifted bets on a hike at the Fed’s June 13-14 meeting as they weighed Logan’s remarks, with July also in view. Chair Jerome Powell has an opportunity to provide more guidance when he speaks at a Fed conference in Washington Friday.

Atlanta Fed President Raphael Bostic, who unlike Logan has publicly backed a wait-and-see approach, has also said that not moving in June wouldn’t necessarily mean the Fed was done raising rates.

“A pause could be a skip or it could be a hold,” he said during a moderated discussion at a conference hosted by his bank Tuesday evening on Amelia Island, Florida.

“We don’t know. There is a lot of uncertainty in the world, and so we’ll have to see how things play out and get a sense of what’s true signal and what’s noise and that’s going to be a week-to-week thing.”

Policymakers have raised rates 5 percentage points in little more than a year, but inflation remains well above their 2% target and unemployment of 3.4% is the lowest in a generation.

Consensus Fraying
The strong consensus Powell has cultivated over the past year is showing signs of splintering.

Jefferson, nominated by President Joe Biden as Fed vice chair, said that the full effects of past tightening have probably not yet been felt in the economy.

That’s an argument for caution, alongside concern that recent strains in the banking sector could dent the economy or that leaders in Washington fail to raise the debt ceiling. Lawmakers are negotiating with the White House to raise the US borrowing limit ahead of a June 1 deadline or risk a catastrophic debt default.

Other Fed officials have avoided a clear policy signal on June, which leans toward a soft endorsement for a pause. But Cleveland Fed chief Loretta Mester and Governor Michelle Bowman have leaned the other way, saying the Fed still has more work to do before it can declare victory in its inflation fight.

“Our baseline is they’re done. But there are risks to the Fed’s path over the summer to the upside,” said Bank of America chief US economist Michael Gapen. “There are a lot of things we need to get past in order to clear the decks for a Fed rate hike.”

Officials could leave a hawkish bias in place if they opt to stand pat next month by projecting — via their updated quarterly interest-rate forecasts — that they are not done with tightening.

Their March dot plot showed rates peaking at 5.1% according to the median estimate, and they reached that level earlier this month. If the median rate projection moved up further in June, alongside an upward revision to their broader economic forecasts, it would signal additional increases ahead without explicitly promising them.

The central bank’s May 2-3 meeting also marked a turning point in Fed decision making. After lifting rates aggressively over the last 14 months, policymakers are now taking a meeting-by-meeting approach that’ll let them more carefully calibrate policy.

With a little less than four weeks before the next meeting, officials are still waiting on a few more key data releases.

“I think the consensus-building direction is to sell June as a ‘skip,’ not a ‘pause,’” SGH Macro Advisors chief US economist Tim Duy wrote in a client note.

“The way to do this is to signal that July is assumed to be a rate hike unless the data flow shows conclusively that inflation and growth are moderating,” he said.

This article was provided by Bloomberg News.