The United States Federal Reserve may be forced to challenge market expectations by raising interest rates strongly again later this year if inflation continues to be high and narrow labour markets, according to Daniel Antonucci, the chief economist and overall strategies in Quintet Private Bank.
The market is now more than 60 percent likely that the central bank will temporarily suspend the monetary consolidation cycle at its meeting next June, according to the CME Fed Watch price tracker in the federal money futures market.
The Federal Reserve has been raising interest rapidly over the past year in an effort to curb high inflation, but the market is able to start lowering interest rates before the end of the year.
The annual principal inflation rate fell to 4.9% in April, its lowest level two years ago, but remained well above the 2% Fed target.
On the other hand, the labour market remains tight with rising unemployment claims but still at historically low levels. Job growth also reached 253,000 in April, despite a slowdown in the economy, while the unemployment rate stabilized at 3.4%, the lowest level since 1969. Average hourly income rose 0.5% per month and increased by 4.4% over last year, both higher than expected.
Antonucci told Squawk Box Europe on CNBC today Friday not to approve market pricing to lower interest rates later in the year.
Given the labour market strength, Antonucci had suggested that lowering the interest rate seemed unreasonable and was only the first case.
"The second reason is that the tension here is that if the labour market remains strong, and if economic activity does not eventually deteriorate to a point where there is an environment of stagnation and inflation, the Fed may have to tighten policy even harder and then have stagnation including stagnation in profits.
The Fed may need to raise prices even harder if inflation remains high.
Antonucci ' s position reflects messages from some members of the FOMC this week, who have reiterated the importance of waiting to monitor the delayed impact of previous interest rate hikes, but have also indicated that the data do not yet justify any close interest reduction.
Loretta Meister, President of the Federal Reserve in Cleveland, said on Tuesday that the Central Bank had not yet reached the point where it could "retention" at high rates where prices were not tied enough, while the President of the Federal Reserve in Dallas Laurie Logan suggested on Thursday that the data so far did not justify exceeding the interest rate raise at the June meeting, and the President of the Federal Reserve in Atlanta, Abel Postick, said that we might have to raise interest rates, too, Kashkari, a member of the Federal Reserve, said that we had a long way to go to achieve the inflation target, as Parkin, President of the Federal Reserve in Richmond, said if inflation continued, interest rates would be raised, and finally, the President of the Federal Reserve in Chicago Austin Julsby said that there was still a significant impact from the next hikes.
Investors will closely observe the speech of Federal Reserve Chairman Jerome Powell today on Friday in search of evidence about the possible course of the Federal Open Market Commission.
As Quincy Crosby said, Jerome Powell was particularly critical of monetary policy," stopped and began "in the 1970s, which contributed to the inflationary recession of the economy, which required a strict monetary policy to restore price stability.
If this is mentioned when speaking on Friday, the market can interpret it as an indication that unless the data improve significantly with regard to inflation, it will call for an increase in the interest rate again.
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