Why Fed Rate Hikes May Be Over

Mission accomplished: Tightening probably won’t continue at the central bank’s meeting next week, says economist Ian Shepherdson.

The U.S. had a blow-out jobs gain in May, adding 339,000, with the previous two months revised upward. That’s evidence that the Federal Reserve will keep on pumping up rates to slow the economy and bring down inflation, right?

Likely not, according to Ian Shepherdson, founder and chief economist at Pantheon Macroeconomics. In his latest report, the noted economist argued that the big payroll increases are the last vestiges of employers’ frantic push to fill vacancies. Those job-count expansions, he wrote, stand a good chance of getting revised downward.

In Pantheon’s view, loss of momentum on restaurants, airlines and hotels revenues show that economic growth is “flattening.” What’s more, wage growth is decelerating. Average hourly earnings went up at a 3.8% annualized rate in the three months ending in May, versus the comparable year-before period’s 4.9%.

Fed policymakers have raised their benchmark rate 10 times between March 2022 and last month, totaling 5 percentage points. Fed Chair Jerome Powell and other top Fed officials have hinted they might skip a rate increase at their next policy meeting, scheduled for June 13 and 14. If so, the question is: What happens after that?

The futures market believes the Fed will stand pat at next week’s conclave and will either maintain the current level (a band of 5.0% to 5.25%) or reduce it by a quarter percentage point by December. The Consumer Price Index, the most publicly watched inflation metric, will be announced for May on the first day of the coming Fed meeting. As of April, the CPI had fallen to 4.9% from its 21st-century high of 9.1%, set in June 2022.

The Pantheon report, which Shepherdson co-authored with Kieran Clancy, the firm’s senior U.S. economist, argued that, using “historical experience,” the Fed has “done enough” to slow the economy and diminish inflation. It commented: “The tightening since March last year is the fastest since the Volcker Fed in 1980-to-81 and ought to be more than sufficient to drive up the unemployment rate.”

Fed actions often take a while to show results, the report noted. “As a rule of thumb, rates totaling more than about 300bp across a year usually are enough to kill economic growth,” the report declared.On this reading, the Fed should not hike again, and should just wait for the impact of its prior actions to work through.”

The Pantheon report stated the possibility that the Fed will enact another rate increase up ahead, but “we expect no further hikes.”

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