US rate futures expect Fed pause in June in sharp turnaround from earlier

4:28 pm Wednesday, May 31st, 2023

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – U.S. rate futures on Wednesday priced in a pause in interest rate hikes by the Federal Reserve at next month’s monetary policy meeting, a massive turnaround from indications of a 25 basis-point increase earlier in the session, according to Refinitiv’s FedWatch.

The big catalyst were comments from Fed Governor and vice chair nominee Philip Jefferson and Philadelphia Fed President Fed Harker who both touted skipping a June rate hike.

Jefferson said “skipping a rate hike at a coming meeting would allow the (Federal Open Market) Committee to see more data before making decisions about the extent of additional policy firming.”

Harker echoed the same sentiment. “I am in the camp increasingly coming into this meeting thinking that we really should skip,” Harker said at an event on financial stability. That said, data due on Friday about the U.S. job market “may change my mind.”

Following their comment, fed funds futures have factored in a 70% chance the Fed will keep rates unchanged next month, up sharply from a 30% probability earlier in the wake of data showing an increase in U.S. job openings.

The Labor Department reported on Wednesday that U.S. job openings unexpectedly rose in April and data for the prior month was revised higher, pointing to persistent strength in the labor market.

The Job Openings and Labor Turnover Survey, or JOLTS report, also showed layoffs declined significantly last month. There were 1.8 job openings for every unemployed person in April, up from 1.7 in March, and well above the 1.0-1.2 range viewed as consistent with a jobs market that is not generating too much inflation.

After the JOLTS report, rate futures had priced in a nearly 70% chance of a rate increase next month.

“We have been suggesting that they (the Fed) stop,” said Ellis Phifer, managing director, fixed income capital markets at Raymond James in Memphis, Tennessee.

“But they are still so nervous of not signaling that they are done. Even though inflation is still high, it seems to be easing. Some things seem like a little bit loose and so if the Fed is going to be on pause, it’s time. They need to let some of this data work through.”

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Diane Craft)