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Why does Wall Street expect the Fed to raise interest rates in June?

The Federal Reserve has been ratcheting up interest rates for over a year to fight inflation. New economic data has Wall Street preparing for another hike.

Wall Street bracing for another Fed interest rate hike

The Federal Open Market Committee (FOMC) is due to meet 13 and 14 June to decide on its future policy regarding interest rates. Since March 2022, the US central bank has raised rates at each meeting ten consecutive times. Those increases have pushed the overnight bank funding rate from near zero to the range of 5.00% to 5.25%.

There had been hope after the last meeting in May that policymakers would hold off on any more rate hikes. However, new economic data last week showed that the US economy is powering forward and inflation is not abating as much as the Fed would like.

Why does Wall Street expect the Fed to raise interest rates in June?

Last week, the Bureau of Economic Analysis (BEA) released data on the US gross domestic product (GDP) and the Personal Consumption Expenditures (PCE) price index. Both sets of economic data exceeded expectations. The Commerce Department on Thursday said that GDP for the first quarter rose 1.3% versus the 1.1% initial estimate reported in April. On Friday, PCE data showed inflation ticked up slightly in April to 4.4% compared to the 4.2% reported in March. While considerably lower than the peak inflation of 9.1% registered in June, that is more than double the central bank’s target rate of 2%.

The two data points in conjunction with a calming in the regional banking sector has Wall Street expecting another rate hike in June. According to the CME FedWatch Tool, future traders sent the probability of a 25-basis point hike soaring from just under 26% to over 64%.

May 2023 Job Openings and Labor Turnover Survey due at the end of the week

The US Labor Department will release its May 2023 Job Openings and Labor Turnover Survey (JOLTS) on Friday 2 June. Economists surveyed by Bloomberg are expecting to see slower job growth with an additional 195,000 new payrolls compared to 253,000 the month before. Likewise, wage increases are forecast to have slowed from 0.5% in April to 0.3% in May month over month with an annual rise of 4.4%, the same as the prior month’s report.

Meanwhile, unemployment is predicted to tick up slightly to 3.5%. However, experts have been consistently underestimating the number of new jobs each month. At any rate, those numbers are still stronger than policymakers at the Federal Reserve are most likely comfortable with. Wall Street has already priced in the possibility of the quarter point increase.


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