It ain’t pretty.
Kevin Warsh’s first week as Federal Reserve Chair comes packed withhawkish expectations both inside and outside the central bank that geopolitical and economic factors may cause the Fed to raise the benchmark Federal Funds Rate sooner than later instead of a long-expected cut to the costs of short-term borrowing
But those expectations could reverse if there is a timely end to the three-month Iran War that will cease energy price spikes, reduce heightened inflation risk and anchor the bond market. As these conditions normalize, policy doves expect an easing that will allow the Fed to lower interest rates — which President Donald Trump has been demanding since the beginning of his second term. The big question is timing.
The latest U.S. economic data reflecting rising price pressures and a stabilizing labor market plus a jittery Treasury bond market has brought increasingly hawkish outlooks from some Fed officials, big banks and market watchers. The widely-respected CME Group FedWatch Tool is predicting a near 100% probability that the central bankers will vote to hold rates steady at the June 16-17 Federal Open Market Committee meeting. As I’ve reported, futures traders expect a near 70% chance of rate hikes to follow including a 43% chance of a rate hike at the December FOMC meeting.