![]() ![]() This will make things feel that bit tighter. At the same time, as the Treasury’s cash balance is increased there should be an associated fall in bank reserves held at the Fed. To the extent that money market funds buy extra bills, it likely means less use of the Fed’s reverse repo facility. But there are repercussions that need monitoring, specifically to do with liquidity management.īills and other bond issues that had been held back are now being accelerated forward as the US Treasury looks to re-build its cash balance held at the Fed. An important one – the viability of the system. Tighter money market conditions post the debt ceiling suspension are doing some of the job for the Fedįrom a system perspective, the debt ceiling resolution leaves the Fed with one less thing to worry about. An average of the two series suggests the economy has flatlined since 3Q 2022. However, an alternative measure of US economic activity, Gross Domestic Income, which combines all the costs incurred and incomes earned in the production of GDP, contracted 2.3% annualised in 1Q 2023 after a 3.3% drop in 4Q 2022 and has declined in three out of the past four quarters. On an expenditure basis, GDP grew 1.3% annualised in 1Q 2023 and 2.6% in 4Q 2022. We see similar mixed messages within the GDP report. Meanwhile, service sector payrolls rose 257,000 yet the ISM services employment index fell into contraction territory. Then we have the manufacturing ISM reporting a rise in its employment survey yet the payrolls report stated there was a 2000 decline. However, the household survey, used to calculate the unemployment rate, showed employment declined 310,000 with unemployment rising 440,000. The establishment survey, which questions employers and generates the non-farm payrolls number, reported a jump of 339,000 in employment in May. Moreover, recent data releases have been sending very mixed messages, which suggests it may make sense pause to evaluate.Ĭonflicting data makes life hard for the Fedįriday’s Labour report is a notable example. This was certainly the commentary from senior Fed officials such as Governor Philip Jefferson and Philadelphia Fed Governor Patrick Harker, that while “there is still significant room for improvement” the Fed is “close to the point where we can hold rates in place and let monetary policy do its work”. ![]() That’s not our base case and we believe there will be a majority on the committee who think they have tightened policy a lot and it makes sense to wait. Next Tuesday’s CPI report could see pricing move even further in favour of a hike – currently the consensus is for core CPI to come in at 0.4% month-on-month, but if we get a shock 0.5% that could be sufficient to convince enough FOMC members to vote for a hike. The result is that pricing for the June FOMC meeting is not far off a coin toss (just under 10bp priced) and July is looking a decent bet for a hike (21bp priced). Hawkish comments from a few Fed officials have added to the sense that they may not be done. Over the subsequent six weeks, activity has remained resilient, inflation continues to run hot, payrolls jumped 339,000 and the Australian and Canadian central banks surprisingly hiked rates. On 4 May, Fed funds futures contracts were pricing in 86bp of interest rate cuts by year end and the target range heading below 4% at the January 2024 FOMC meeting. Markets took this as a signal that we may already be at the peak with the fear that the combination of high borrowing costs and tighter lending conditions could prompt a recession with inflation falling swiftly back towards target. ![]() ![]() Just over a month ago, Federal Reserve Chair Jerome Powell hinted that after 500bp of rate hikes over a 14 month period, interest rates may finally have entered restrictive territory and the Fed could pause at the June meeting to take some time to evaluate the effects. ![]()
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