With labor demand remaining strong in the U.S. economy Barclays strategists led by chief U.S. economist Marc Giannoni have boosted their expectation for the peak federal funds rate because they don’t see “enough evidence of sustained wage deceleration to pause before mid-summer.”
As a result the Barclays analysts added another 25-basis-point rate hike to their forecast, bringing their peak federal funds target range outlook to 5.25%-5.50% at the Federal Open Market Committee’s June meeting. They now expect the fed funds rate to be 5.0%-5.25% at year-end vs. the 4.50%-4.75% in its prior outlook.
“We retain high conviction that the FOMC will need to see convincing evidence of slowing labor demand before considering a pause, and incoming data suggest that this is unlikely within the next few months,” they said in a note to clients.
Traders are pricing in a 47.8% probability that the Fed will increase its policy rate to 5.0%-5.25% in June and a 37.1% probability it will rise to 5.25%-5.50%, according to the CME FedWatch tool.
The analysts point to a number of factors keeping pressure on inflation: the Fed’s rate hikes are taking longer than expected to reduce labor demand, hints that wage deceleration stalled in January, supply bottlenecks are taking longer to resolve, and disinflationary pressures on goods prices are “losing steam.”
Looking beyond 2023, the Barclays analysts still expects six rate cuts in 2024, which lifts the 2024-end target range by 50 bps to 3.50%-3.75%.
SA contributor Mott Capital Management said on Monday the odds are rising that rates go even higher than the FOMC’s prior median terminal rate of 5.1%.
Earlier this week, New York Fed President John Williams said he sees the need for two more 25-bp rate hikes, bringing the terminal policy rate to 5.0%-5.25%.