Jun 1, 2023 - Economy

A "skip" might be next for the Fed

Fed vice chair-designate Philip Jefferson pictured at a conference

Federal Reserve governor and vice chair nominee Philip Jefferson. Photo: Drew Angerer/Getty Images

The May jobs report hasn't even been released yet, but already Fed officials are signaling the central bank is willing to skip a rate hike later this month.

Why it matters: As a result, investors have now all but unwound bets of a hike at the June 13-14 policy meeting.

The big picture: The Fed has consistently stressed that it would rely on incoming economic data to determine the pace of rate hikes — an idea that appeared to put enormous weight on the inter-meeting data releases.

  • Last week's hotter-than-expected inflation report, therefore, caused markets to start pricing in a June hike.

Between the lines: Fed officials have put "so much weight on these data releases, which tend to be quite volatile and can be revised significantly," says Greg Daco, chief economist at EY-Parthenon.

  • "That means there can be significant swings in market pricing and market expectations. That could entail a potential rapid tightening of financial conditions that may not necessarily be what's desired by the Fed or optimal for the economy."

What's new: Comments from a top Fed official ahead of the jobs report suggested that officials may hold off at the upcoming meeting — removing the pressure to read too much into Friday's jobs data and the upcoming Consumer Price Index.

What they're saying: "A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle," Philip Jefferson, a Fed governor who was nominated to step up to the second-in-command position at the central bank, said yesterday in a speech.

  • "Indeed, skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming."
  • That followed comments from Philadelphia Fed president Patrick Harker, who said: "I am in a camp increasingly coming into this meeting of thinking that we really should skip, not pause." (Other regional Fed bank presidents, however, have been more hawkish.)

What's next: The May jobs report, out Friday at 8:30am ET, is expected to show a still-healthy but slower pace of jobs growth and more moderate wage growth compared to April.

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