Fed Dilema Resolved; Treasury's Just Beginning

Prior the US April jobs data, the Fed funds futures had been straddling the fence, with a roughly 50/50 chance of a hike/pause. The weaker than expected job growth resolves the dilemma and shifts the odds convincingly toward a pause. The Federal Reserve will signal to the market next week that it is prepared to pause, barring significant surprises in the next string of data.

As has been the pattern in recent months, the FOMC meeting and rate decision are largely non-events. The market remains confident of a 25 bp rate hike on Wednesday May 10. The uncertainty lies with the accompanying statement.

Inflation Pause at the Fed's Pause

Over the past six months, we have warned that the market has consistently under-estimated the magnitude and duration of the Federal Reserve’s monetary tightening cycle. Unwaveringly we forecast Fed funds to be at least at 5.5% by the end of this year and we recognized upside risks to our scenario. We had thought that the Fed would pause in June and resume raising rates after the summer. We now see a June rate hike as likely and we would view such a hike as being in addition to the other hikes we had envisaged later this year. We expected the Fed funds target to be at least at 5.75% at the end of the year, with upside risks that carry into early next year.