Why an interest rate hike is still on the table for June
BY Megan Cassella, BARRON'S – 05/19/2023
The fire hose of commentary from the Federal Reserve this past week made one thing clear: Central-bank officials are fiercely split on how to navigate the policy path forward and whether to raise interest rates or hold them steady when the Fed’s policy-making committee next meets in June.
Officials laid the groundwork at their May meeting for the Fed to pause next month, although they stopped short of committing to specific next steps. But since then, a series of economic surveys and data releases have appeared to show an economy that looks increasingly stable.
That has emboldened the central bank’s hawks to publicly endorse the idea of at least one more rate boost in June, given that the pace of inflation remains more than double the Fed’s target. Dallas Fed President Lorie Logan, a voting member of the Federal Open Market Committee, was perhaps the most explicit, saying Thursday that while the data “could yet show” it is appropriate to skip a rate hike, the current environment suggests that “we aren’t there yet.”
The economic case for further policy tightening centers on fresh optimism that the U.S. will be able to stave off a recession, at least until sometime next year. A new working paper from economists at the San Francisco Fed shows that, despite years of strong demand and high inflation, U.S. households across the income spectrum still hold an estimated half-trillion dollars in excess savings—enough to fuel consumer spending at least into the fourth quarter of 2023.
At the same time, some of the more interest-rate-sensitive sectors of the economy that had been impacted by monetary-policy tightening—namely, housing and manufacturing—could be reaccelerating.
Skanda Amarnath, executive director at Employ America and a former research analyst with the New York Fed, notes that growth in multifamily residential units under construction and resilience in mortgage demand both are helping to paint an “encouraging picture” for the housing market. Manufacturing data out this past week from the Philadelphia Fed, he added, suggest that the most contractionary months for that sector could be behind us.
Buoyancy in housing and manufacturing isn’t “a typical thing you see right before a recession,” Amarnath said.
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