Fed Eyes June Rate Hike

Mixed economic data persists, but that isn’t stopping the Federal Reserve from raising interest rates.  In an attempt to make borrowing more expensive for consumers, the Federal Reserve may increase its Federal rate target in June.

While markets have been pricing a very low probability of a June rate hike, the Federal Reserve has gone on the offensive, with officials giving several interviews with the press hinting that June will see a rate hike.

Mixed economic data persists, but that isn’t stopping the Federal Reserve from raising interest rates.  In an attempt to make borrowing more expensive for consumers, the Federal Reserve may increase its Federal rate target in June.

While markets have been pricing a very low probability of a June rate hike, the Federal Reserve has gone on the offensive, with officials giving several interviews with the press hinting that June will see a rate hike.

Currently, future markets price a near 4% probability of a rate hike in June, but Federal Reserve President Jeffrey Lacker has urged investors and Americans to expect a hike. In an interview with The Washington Post, Lacker said that the Fed is ready to raise rates—and in fact should have already done so.

“If you look at the benchmarks for where rates ought to be, these are relationships between employment and inflation and the funds rate that have characterized our behavior when we’ve been successful in the past. Those benchmarks indicate that we ought to have moved several times by now,” he said, adding that the Fed is “falling behind” by not acting sooner.

Economic data has been mixed. The Atlanta Federal Reserve’s GDPNow model expects 2.8% GDP growth in the second quarter of 2016, a strong increase from a previous 1.7% growth rate the model predicted a few weeks ago.

Part of the strength has come from retail sales, which recently showed a strong resurgence. A recent census study saw total retail sales jump 3% on a year-over-year basis in April, after anemic month-over-month growth in February and a decline in March.

At the same time, the last employment report showed just 160,000 jobs were added to the economy in April, while unemployment claims rose earlier this month.

The Federal Reserve has dismissed weakness in the labor market on several occasions. Last week, New York Fed President Bill Dudley said of the jobs data: “It’s a touch softer, maybe, than what people were expecting, but I wouldn’t put a lot of weight on it in terms of how it would affect my economic outlook.”

Now Lacker echoes that perspective, saying that “labor markets are, I think, very tight,” while pointing at higher wage inflation as a signal of an improving job market.

“The downside scenarios just haven’t materialized. While there’s always some room for uncertainty, there are always things that are uncertain about the months ahead,” Lacker said.

The Federal Reserve will meet to discuss its decisions on June’s interest rate in approximately one month. Meanwhile, markets continue to see low inflation and little chance of a rate hike soon, with the 10-year Treasury yielding just 1.75%.