Fed Officials Signal May Hike In Recent Statements

Two Federal Reserve officials have signaled the likelihood of a 0.25-percentage-point May hike in separate interviews. This confirms the view of debt markets which now give an 8 in 10 chance of rates exceeding 5% at the Fed’s upcoming May 2-3 meeting.

Bullard’s View

James Bullard, President of the Federal Reserve Bank of St Louis signaled that another hike was appropriate given “persistent” inflation in a recent interview. Bullard downplayed the markets’ recession fears given the strength of recent employment data. He also pointed to low levels of financial stress implying that the recent banking crisis may have passed.

Bostic’s Perspective

Separately, Raphael Bostic, President of the Federal Reserve Bank of Atlanta said “one more hike should be enough” in a CNBC interview. These two recent statements mirror the Fed’s general view that inflation in the U.S. despite recent declines, remains too high and is the priority.

Wall Street’s Expectations

Wall Street, and especially bond markets, see a risk of a recession, but the Fed is not seeing that in the economic data and so continues to aim for high rates to cool inflation back to the Fed’s 2% goal.

The 2023 Rate Outlook

That said, the Fed appears close to the top of the interest-rate cycle and may take a wait and see approach after a potential May hike. That’s because the Fed expects the current high level of interest rates to increasingly restrict the economy and cool inflation over time. This means the Fed believes it can meet its inflation goal by holding rates around the current high levels, rather than making further aggressive hikes from here. In part, that’s because as we saw with the recent banking crisis, continuing to raise rates presents economic risks.

With the next Fed meeting just two weeks away, these recent statements together with market expectations suggest that another 0.25-percentage-point hike is coming. However, the path for rates at meetings after May depends on economic data. Markets see a good chance that a deteriorating jobs market causes the Fed to cut rates. The Fed sees some chance of recession, but ultimately believes the economy may remain robust, and that holding rates steady or, less likely, even a few more small hikes might be possible.