Odds of US rate hike in June soar from 5% to 40% in a week

Over the past several weeks, the consensus among market analysts was that the central bank would halt its policy tightening cycle. However, recent developments have sparked a reevaluation of these assumptions, as a minority hawkish view gains traction within the Federal Reserve (Fed).

On Friday, May 19, Fed futures showed that there is now a 40% chance of a 25 basis points (bps) rate hike in June, up from just around 5% last week. 

According to Fed Futures, there is only a 4.4% likelihood that interest rate cuts will begin in July and a 26% chance in September. 

The expectations are changing at a rapid pace in the hawkish direction as a total of 14 Federal Reserve speakers are expected to make the rounds this week at media appearances and conferences, including Chairman Jerome Powell. 

What are Fed representatives saying?

The abrupt shift in expectations comes as the US central bank is not yet convinced that the fight against inflation is over. 

On May 18, two Fed policymakers said that US inflation is not showing enough signs of cooling to allow the central bank to halt its more than a-year-long interest rate hike campaign. 

The comments came from Dallas Fed President Lorie Logan and St. Louis Fed President James Bullard. While the two policymakers represent a minority hawkish perspective at the central bank, it appears that this view has been picking up pace ahead of the Fed’s next meeting scheduled for June 13-14. 

Investors and market participants are now anxiously awaiting Powell’s speech on Friday, where he will provide more updates on the Fed’s stance in light of mixed economic data since the bank’s last meeting. 

The annual inflation rate eased to 4.9% in April, though it is still a far cry from the Fed’s 2% target. In the meantime, jobs data showed that hiring has also slowed down in the US, though unemployment sits at its lowest level since 1969, at 3.4%.