Could the Fed Be Planning to Hop, Skip and Jump Over an Interest Rate Hike in June?

Key takeaways

• The Fed is set to make a decision on interest rates this week, with many anticipating a pause
• Language from Fed officials suggests the rate increases will resume in July as jobs data still remains strong and inflation data is sticky
• The stock market’s not too worried, with the Cboe Volatility Index at its lowest point since October

It’s crunch time for the Fed this week, with their decision on a June interest rate hike or pause due any day. Ahead of some critical inflation data released tomorrow, most bets are on the Fed pausing, or more ominously, ‘skipping’ a month and resuming hikes in July. Wall Street’s still pretty chill about the whole thing, though.

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What could the Fed decide about interest rates?

We recently started hearing new language coming from Fed officials about ‘skipping’ an interest rate hike in June, strongly implying we could see a further increase in July. What’s caused this? A resilient jobs market most recently saw private payrolls rise by 339,000 instead of the predicted 190,000 figure, even though unemployment rose and wage growth decreased. This suggests to some Fed officials that further rate hikes are needed to tame inflation.

We’ll better understand what’s to come once the May CPI data is released tomorrow. It’s predicted that core CPI will be up 0.4%, making the year-over-year rate 5.2% — an improvement from April’s 5.5% figure but still a slow and steady fall rather than the rapid decline the Fed would prefer to see. Headline CPI is predicted to hit 4.1%, another decrease from April that gives the Fed breathing room for a pause if it comes true.

Wall Street’s prepping for a pause

As it stands, the CME FedWatch tool has the likelihood of a pause in interest rates at 73.6%. It’s not a done deal, but it’s pretty sure. Wall Street is still counting on rate cuts — the Cboe Volatility Index, which measures how jittery the market is, has fallen from highs of 32 in October to just 13 this month.

The S&P 500, which has just entered a bull market, may decline if safer Treasury yields continue to grow. But this week, we could see two-year Treasury bond yields decline slightly if interest rates are paused, making stocks more attractive.

The futures markets are currently favoring a quarter-point July hike after this month’s anticipated pause. While previously, the odds were dead set on rate cuts by the end of the year, now those have changed to about 50–50.

The bottom line

Everyone is pretty confident that the Fed will pause interest rate hikes in June, but what happens after that is anyone’s guess. With inflation still high, the jobs market holding up much better than anticipated and the stock market’s relentless optimism about interest rate cuts in the future, you’d have better luck looking into a crystal ball to try and see how the economy’s holding up.

Inflation, when it’s sticky, is sucky. Then again, if you’ve got Q.ai’s Inflation Protection Kit in your investing arsenal, you can make the best of the situation. The Kit has commodities, precious metals and securities that either match or beat inflation, with an AI algorithm assessing which ones are set to outperform. It then adjusts the weightings to help you secure risk-adjusted returns.

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