Why the new bull market is heading for more Fed pressure after a pause

  • Stock and bond markets are betting that the Federal Reserve will pause interest rate hikes, the most aggressive monetary policy since the 1980s, at the Federal Open Market Committee meeting this week.
  • Former Fed Vice Chairman Roger Ferguson told CNBC that he believes the Fed’s decision is much closer than the market expects, and what comes next will be more central bank hikes to tame inflation.
  • Investors should prepare for the Fed “which will continue to go higher,” he says.

Traders are signaling a pause in interest rate hikes most likely outcome From this week’s Federal Open Market Committee meeting of the Federal Reserve, and it comes at a time when some strategists say a new bull market is underway. The Dow Jones Industrial Average posted three winning sessions in a row to end last week, the Nasdaq Composite experienced its sixth consecutive positive week for the first time since November 2019, and all major indices closed above their 50-day and 200-day moves. Averages on Friday.

“The bear market is officially over,” Bank of America equity strategist Savita Subramanian said recently, noting that the S&P 500 rose 20% above its October 2022 low.

Some question the call for a new bull market based on how narrow the market lead is — a handful of the biggest technology stocks are responsible for much of the rebound in market indexes. But there is another important reason investors should not become overconfident. Even if the Federal Reserve decides to pause on announcing its latest FOMC decision on Wednesday, the long-term shift by the Fed in the most aggressive period of monetary policy since the 1980s is in no way certain or justified.

This is according to former Fed Vice Chairman Roger Ferguson.

Last month, the Fed approved its 10th interest rate increase in just over a year, the fastest tightening of monetary policy the central bank has taken since the 1980s, with major repercussions not just for the stock and bond markets, but for the economy and consumers. . In the May FOMC meeting statement, the Fed removed wording about the need for “additional policy tightening” in order to meet inflation targets. This has helped maintain the majority view in the market that a temporary halt will be announced this week.

But Ferguson is still not convinced.

“I think the stop here is really a closer call than what the market is currently expecting,” he said in an interview on CNBC’s “Squawk Box” on Friday. And even if the Fed pauses, Ferguson says that doesn’t mean more rate increases won’t come through the rest of the year.

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“The market should prepare for the Fed which will continue to rally even if there is a pause,” Ferguson said.

He’s not the only one who thinks the Fed pause won’t last long. “We think the Fed ended up skimping this month, but set the action schedule in July,” Michelle Girard, president of the US division at NatWest Markets, said in an interview with CNBC Chief Economic Correspondent Steve Leisman.

A pause is very likely, according to former Atlanta Fed President Dennis Lockhart. However, he indicated in an interview on CNBC’s “Extra Closing Bell” that inflation will continue to be an issue for the Fed. “There is some digestible evidence of declining inflation, but it’s very gradual. I think the committee still has a big challenge, especially with the 2% target,” Lockhart said, referring to the Fed’s stated goal to bring inflation back. Down to a target range of 2% over the long term.

On an annual basis, inflation was 4.9% in April, slightly below market estimates, but still “holding,” as noted in prices across the economy, and in many CEOs on record for saying inflation. will continue. Next week will include the latest reading of the annual and monthly inflation trend with the May CPI report due on Tuesday, the first day of the two-day FOMC meeting.

Traders react as Federal Reserve Chairman Jerome Powell appears delivering remarks on a monitor, on the floor of the New York Stock Exchange (NYSE), May 3, 2023.

Brendan McDiarmid | Reuters

Ongoing concern about inflation is one of the factors that led Ferguson to see more potential for a rally on Tuesday. This view is supported, among other things, by the still tight labor market. Wage growth has slowed, and unemployment is on the rise. But Ferguson cited about 1.7-1.8 jobs for every unemployed person, much higher than normal; and wages that have continued to rise, not only in recent national data but also in terms of what he hears from CEOs — Ferguson sits on the boards of several large corporations, including Alphabet and Corning.

“I think the overall picture is one of inflation pressures and inflation that’s higher and more steadily than the 2% figure that the Fed was aiming for. So I think it’s really the data here that tells us more hikes are on the way,” he said.

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Others see the recent cooling in the labor market as a sign that the Fed may soon need to moderate its rate-raising strategy. Wharton professor Jeremy Siegel recently told CNBC that while the Fed has expressed a strong commitment to lower inflation, the central bank’s dual mandate is to achieve the inflation target and promote maximum employment. On a historical basis, unemployment remains very low — less than 4% — but jobless claims recently reached their highest level since October 2021.

“I’m talking about trend here,” said Siegel.

For now, the Fed can be “as aggressive and hawkish as it gets,” Siegel said, because there hasn’t been much of a recovery in unemployment, and workers still feel confident about the job market prospects. There are some signs that worker confidence is declining. The latest reading of the Conference Board’s Consumer Confidence Index showed that the consumer’s assessment of current business conditions passed ‘most significant deterioration’ in May among the consumer confidence data it tracks. Labor economists told CNBC that recent data from the labor market supports Fed Chair Jerome Powell’s view that the central bank can engineer a soft landing for the economy.

“There’s nothing here that makes me think we’re not in a soft landing scenario,” said Rocha Vancoudri, chief economist at labor market advisor Lightcast in a recent interview after May’s nonfarm payrolls report. “I wouldn’t be surprised if the Fed decided to keep interest rates where they are. All indications are that the economy is heading in the right direction.”

All recent data points are broadly aligned with the soft landing hypothesis, says Nick Bunker, director of economic research at Indeed Hiring Lab. “The overall picture here is that the labor market is cooling in a sustainable way. There are signs of moderation and not many red flags,” Pinker said.

But there is an old saying on Wall Street that the job market is always the last to know when a recession hits.

“Let me just say one thing,” Siegel told CNBC. “If we get a negative work report within the next month, or two months, it’s going to make headlines, for the first time since Covid. And then people are going to say, ‘Oh, can I be sure I’ll get another job?'” And that’s going to play into politics and I think it’s going to put pressure on the Fed on the other side, and then they’ll start to say, “Well, maybe inflation will get better.”

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Goldman Sachs recently downgraded its view in the House of Representatives of the prospects for the US economy entering a recession, but its CEO David Solomon — who remains convinced high inflation will persist — and Ferguson remain unsure how future Fed decisions will shape the economic outlook. Solomon said at a recent CNBC CEO Council summit that “some of the structural things going on” related to inflation would make it “easily” difficult to return to the Fed’s 2% target, and even if the Fed pauses, based on what it sees now in the economy, it doesn’t. There is an expectation of a rate cut by the end of the year – an outcome that bond traders are betting on.

Ferguson fears that high levels of inflation may force the Federal Reserve to increase interest rates to a level that effectively forces the United States into recession. “I’m still in the camp that a recession is a real possibility. Hopes are short and shallow, but you know, let’s see, and let’s hope Goldman is right,” Ferguson said.

Former Fed Governor Frederick Mishkin shares concerns about inflation, and believes the right course for the Fed is not to pause in June.

“I can understand why [the Fed] Maybe you want to [pause]In a recent interview with CNBC, Mishkin said, “It wouldn’t be so terrible if they did. But I think we’re in a situation where the inflation numbers are still high, very slow to come down toward the 2% target.”

Mishkin said he’s most concerned about core inflation, which is a reliable number for predicting what the future path of inflation will be. “The economy and labor market remain strong, there is some weakness but we have a long way to go before inflationary pressures are contained, and therefore I think the Fed will have to raise interest rates, and it is best to do so now to show their strong commitment to keeping inflation in check.”

Ferguson said the pause is unlikely to cause significant damage to the economy, even if a rate hike is needed later, pointing to examples of “early stopers” – the Bank of Canada and the Reserve Bank of Australia. “Both of them have stopped and are now back in the process of hiking,” he said.

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