Fed Signal for Rate Pause Takes Pressure Off Hot Jobs Report

Federal Reserve Board Governor Philip Jefferson (Drew Angerer/Getty Images/TNS)

(Bloomberg News/TNS) — Federal Reserve officials are signaling they plan to keep interest rates steady in June while retaining the option to hike further in coming months, steering market expectations ahead of a key employment report.

Governor Philip Jefferson, a centrist who’s nominated to be vice chair and who often echoes Chair Jerome Powell’s views, said Wednesday that skipping an increase would give policymakers time to assess data but not preclude future tightening.

That view undercuts the importance of the monthly jobs report, due Friday, which has often been viewed by Wall Street as a key data point swaying policy. After Jefferson spoke, investor bets for a hike at the June 13-14 Federal Open Market Committee plunged to about 35% Wednesday from nearly 60% a day earlier.

“I definitely think this was a signal” and “likely completely in sync with Chair Powell’s views,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “Just the response of market pricing makes it clear that the message is getting through.”

The S&P 500 was up 1% Thursday, following news the House passed debt-limit legislation forged by President Joe Biden and Speaker Kevin McCarthy that would avert a destabilizing U.S. default.

The FOMC has raised rates by 5 percentage points in the past 14 months to curb inflation running more than double its 2% target. With its benchmark rate now in a 5% to 5.25% target range following a quarter-point increase in early May, Powell has said that policymakers could afford to watch the data and the evolving outlook.

The case for a suspension of hikes rests on the idea that monetary policy works with a time lag, so the impact of past rate hikes has yet to fully weigh on the economy and labor market. Moreover, recent bank failures have resulted in tighter financial conditions which will reduce credit availability by an uncertain amount, further hurting the outlook.

“Skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming,” Jefferson said.

At the Fed, the vice chair often speaks for the central bank. While Jefferson has yet to be confirmed by the Senate, economists took his comments as reflecting those of the Fed chair.

Jefferson’s remarks “seem like a campaign,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets in New York. “He is taking to heart his new role as Powell’s wingman and vice chairman.”

The message was echoed Wednesday by Philadelphia Fed President Patrick Harker, who also urged a June pause while stressing that officials could instead shift to moving at every other meeting if they need to keep tightening.

Not everyone agrees the Fed will pause. A June rate hike is more likely following an increase in job openings, while markets “overestimated the significance” of the Jefferson speech, former Fed governor Laurence Meyer and his colleagues at research firm Monetary Policy Analytics said in a note Wednesday.

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