The central banker’s rate hikes are slowing inflation but roiling the banking industry.
The Federal Reserve meets this first week of May with observers fully expecting the central bank to increase interest rates one more time before taking a pause in what has been the most aggressive monetary tightening in decades.
But where the Fed goes after that remains a matter of speculation. A timeout is on the table after a year of rate hikes, but whether that turns into a series of cuts later this year or keeping rates high for a few more months are among the possibilities.
The economy is definitely slowing but that weakening is uneven, with some areas of the economy such as housing and manufacturing taking it on the chin but some parts of the service economy such as travel doing well.
And early Monday, California bank regulators seized First Republic Bank, a San Francisco lender that saw its deposits dwindle amid rising interest rates that will now be taken over by JPMorgan Chase. It is the second largest bank failure and comes barely two months after the collapse of Silicon Valley Bank.
“The first week of May provides market participants with a busy week of instructive economic indicators and another eagerly anticipated FOMC meeting which will hopefully provide greater clarity on the health of the economy and the near-term direction of monetary policy,” Sam Bullard, managing director and chief economist at Wells Fargo, wrote on Sunday.
Bullard added that Wells Fargo believes “the statement and the press conference likely will signal that May’s hike may very well be the last of this tightening cycle.”
“If most officials see the May meeting as the final hike of this cycle, then we would expect the statement to no longer include the phrase that “some additional policy firming may be appropriate,” he said.
One thing the Fed will look closely at is the state of the labor market. On Tuesday, the Labor Department will report the number of jobs open for March and that is expected to show a small decline to 9.73 million from nearly 10 million in February. Companies have been pulling back on hiring plans and in some industries such as finance and tech, layoff have been rising. However, the job market is still very strong by historical standards and wage growth remains at about a 5% annual rate.Private payroll firm ADP will release its monthly employer survey on Wednesday. Forecasts call for about 150,000 jobs to have been added in March, a little better than February’s 145,000. But the week’s big labor market number will be the April jobs number from the Labor Department on Friday. Economists are expecting that to be down from March’s 236,000 to around 190,000, but these numbers have tended to surprise in recent months.
Still, it is the Fed announcement on Wednesday that will likely overshadow much of the week as well as the follow-on press conference from Fed Chairman Jerome Powell. Powell has hinted in recent comments that a pause could be coming, and other Fed officials have made similar statements in speeches. But whether that is simply a pause or a change in the direction of interest rates is still being debated hotly.
The uncertain picture that is being portrayed by the data is also a factor. On Friday, the personal consumption expenditures price index came in as expected, as inflation continued to show a decline. But wage growth, a key component of overall inflation, came in a little higher than forecast.
“Today’s PCE inflation report and wage growth rate give mixed signals to the economy,” Sinem Buber, lead economist at ZipRecruiter, said on Friday. “Even though a slight deceleration in PCE core inflation rate is good news, the acceleration in wages and salaries is likely to concern the Fed. The Fed might proceed with a 25 bp rate hike on May 3rd given the mixed signals from today’s economic indicators.”
Markets enjoyed a strong March, with the Dow Jones Industrial Average notching its best monthly performance since January. But should the Fed disappoint investors on Wednesday, markets could react badly.
