On the one hand, stock markets heard Federal Reserve Chair Jerome Powell reiterate his comments of last week that “disinflation” had become visible. (Disinflation is a slowing in the inflation rate.)
At the close today the Standard & Poor’s 500 was up 1.29% and the NASDAQ Composite was higher by 1.90%.
On the other hand, bond markets and investors betting on the direction of the Fed Funds rate heard the Fed chairman tell the audience at the Washington Economics Club this morning, that the labor market remains extraordinarily strong, and if the jobs market doesn’t cool, the Federal Reserve will need to take its peak interest rate higher.
The yield on the 10-year Treasury rose another 2 basis points today to 3.66%. The odds in the CME FedWatch tool, which measures the likelihood of a Fed move by looking at prices in the Fed Funds futures market, shifted toward a greater likelihood of another 25 basis point interest rate increase at the June 14 meeting after 25 basis point increases at both the March 22 and May 3 meetings. Odds of a 25 basis point increase in June rose to 35.6% today after being just 3.6% on January 31. The market consensus until the huge January obs surge reported last week is that the Fed would pause its interest rate increases after the May 3 meeting and that there would be no increase in June.
If the job situation remains very hot, “it may well be the case that we have to do more,” Powell said. “We think we are going to need to do further rate increases. The labor market is extraordinarily strong.”
Nobody really wants to hear it, since it makes investing either bull or bear very difficult, but it looks like the Fed is saying that its policy will follow the data.
And since no one knows what future data will say….
