Interest rates: markets price in another rate increase, then a pause?
While the financial markets have been yearning, since the fourth quarter, for a halt to the steady rise in interest rates, the Fed probably isn’t done just yet, according to Kiran Kini, CoBank senior vice president and treasurer.
“The market is pricing in for the Fed to hike interest rates another 25 basis points—one-quarter of one percent—at its upcoming meeting on May 2 and 3,” said Kini. “That is consistent with what we are hearing from the Fed.
“There is a camp within the Fed that wants to pause the rate increases, and my view is that they should pause,” Kini continued. “Market conditions are still fragile, but it seems clear that they will make another increase given that things have settled down in the banking system. They also don’t want to repeat the mistake of falling behind in rate increases, which they did at the beginning of this inflation cycle. I do, however, expect the Fed to pause raising rates after this meeting.”
Kini also noted that price inflation—the impetus for the rate increases—continues to cool, although not to the level the Fed wants.
“Headline inflation has come down quite a bit because of energy prices declining,” said Kini. “Core inflation has come down, and rents have started to come down as well. But the Fed is looking at a measure called super core, which excludes housing because it takes a longer time for rents to come down.
“The Fed is pleased with the trajectory, but core inflation excluding housing has remained surprisingly sticky,” he added. “They're worried that if they don't see more progress, there will be more work to do. So inflation has indeed come down, but not to the Fed’s satisfaction.”
Kini also noted that the Fed is not terribly concerned about strong employment. A positive sign is that upward pressure on wages is abating.