Economist explains why she sees two more Fed rate hikes ahead

the comments from Philip Jefferson and Patrick Harker sparking a major swing in the FED fund Futures earlier today the likelihood of a rate hike in June sat at more than 70 percent and now we're at less than 30 percent our next guest though has been expecting rates to rise at both the June and July fed meetings and still has that as their base case let's bring her in we want to talk to Veronica Clark a city Economist Veronica it's great to see you here so you still think two rate hikes are warranted why yeah I I do I would be cautious with some of the FED comments that we got today um I think this is a really genuinely data dependent fed at this point um we do of course still have you know jobs report on Friday CPI right ahead of the just the June decision um if we believe that the FED is truly data dependent um then our fed funds forecast comes down to what we think is we're going to see in the data it comes down to our inflation forecast our jobs forecast and we still see a lot more persistence to inflation than I think the FED does and that means rates still need to rise more so uh you still Yes you said the FED is data dependent but you have a couple voices coming out today and kind of signaling the expectations for uh pause uh that doesn't like that really doesn't change your base case at all or give you pause to that thinking yeah they were definitely dovish comments I think relative to what we were pricing this morning I think this is a Fed that you know if they're data dependent then the the chance of a hike at any given meeting should be dependent on the data and we were pricing you know close to 20 basis points for the June meeting this morning after we had those the strong job openings numbers um if you want that to be more like 50 50 I think maybe that's what you know that officials were trying to do now really let it be swayed by the data that we're going to get on on Friday and on June 13th Veronica what about the risk of recession many people are warning that hey we might want to pause see how things play out and not just some fed officials we also heard it from a number of economists what does this do though if we do see two rate hikes in the month of June and the month of July what does that do in terms of the odds of a recession and what that could potentially look like yeah we we do have a mild recession in our in our base case really for the end of this year um although I know I think everyone has been pushing out their expectations for when a recession might come um we have just seen a lot of resilience in the labor market and in activity and in consumption um but we are expecting that to happen later this year um but it comes down to you know we're trusting that the FED is is going to do what it takes to get inflation lower um and from our standpoint rates aren't quite restrictive enough and getting them restrictive enough yeah it does cause a weakening in the labor market does cause a recession but it importantly is enough to bring inflation back to two percent yeah Veronica you mentioned a few times that inflation remains you expect it to be pretty sticky here persistent I guess how sticky to expect at some of these higher prices to be when we look out to the end of the year what do you think that inflation number most likely will be right around yeah I think a lot of the inflation data gets a little bit tricky a little bit more nuanced here um we've seen the slowing in Goods prices you know that's related to supply chains correcting um shelter prices are starting to come down now um but the really sticky part of inflation which is only about a third or so of course CPI inflation but over half of the fed's measure pce inflation which is this non-shelter Services those can stay really strong our forecasts for for core PC inflation which the FED is going to have to update their own forecast in a couple weeks is for 4.2 percent still for the end of this year the fed's forecast is very likely going to come up in in June their last at 3.6 percent where we're still much higher than that Veronica so the consumer has consistently been the backbone of the economy consumer spending uh has held up but one of the things that we've been looking at is the potential impact to consumer spending resulting from this jet ceiling uh deal that's going to be voted on later today and one of the points in there is the um the pause on student loan payments will go away basically what do you expect to be the ripple effect the economic ripple effect to consumer spending resulting from people having to pay their student loans again yeah it should probably weigh on on consumption uh maybe just by a couple tents um from from some rough numbers um I think most importantly though for consumption you know we have had some excess savings that are still going out but most importantly is that the labor market is still really strong people are you know still employed still earning a higher nominal wage than they you know were a couple years ago that's really what is still supporting consumption here and until that labor market story changes I wouldn't expect actually a a real big drag you know on consumption what are you expecting from the jobs report this Friday we have a 200k payroll forecast on the unemployment rate staying low at 3.4 percent um wages average earnings Rising about 0.3 but with some upside risk there Rhode Island we're jumping all over here but bringing it back to how the FED is looking at this data that we're getting out the home price number that we got out this uh earlier this week Rising for two months in the row how problematic do you think that is for the Fed yeah we had some interesting comments this morning from fed Governor Bowman about you know housing which you know is a new upside risk maybe to inflation home prices specifically are not you know an input into consumer inflation measures it's shelter prices that are measured by rents um but if housing demand is is bottoming which it seems like it is and you know housing Supply could still be pretty limited you know people are hesitant to sell homes and relinquish lower mortgage rates um there could be upward pressure on prices still and there's some limit then into you know how much shelter prices might ease they probably still do for you know another six months or so but there could be some floor there and it is probably a new upside risk that the FED should be a bit worried about and speaking of what the FED should be worried about what would uh change your view about what the FED would do like would it be the job jobs picture happening this Friday change what you're thinking I mean you said that this is obviously a data dependent fed what changes your expectations for the feds meeting in June and July yeah it absolutely will come down to the data for us also um there's there's certainly a weak enough number that we could see on Friday that that might do it you know maybe something less than a hundred thousand um I think the market is is maybe expecting that we need an upside surprise to payrolls um an upside surprise to CPI that we'll get on on June 13th um I I would think that maybe the bar is a bit lower for for how strong the data might be for the FED to still be hiking um because they're going to have to update their forecast in June and they'll have to update them in a way that shows stronger activity stronger inflation and that should mean higher rates still too great Insight Veronica Clark City economists are thanks to you

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Length: 6min 56sec (416 seconds)

Published: Wed May 31 2023