The US labor market picked up momentum in May, once again defying expectations of a slowdown. But Federal Reserve officials are still likely to suspend rate hikes in their upcoming policy meeting because of broader trends pointing to a weakened economy later in the year.
The debate over suspending rate increases or hiking yet again later this month has remained intense, and May’s robust jobs report certainly makes it even more difficult to decipher what’s going on in the economy, but there seems to be enough of an argument for Fed officials to defend a pause, or a “skip,” in rate increases when they meet on June 13-14.
That would snap a streak of 10 consecutive rate hikes that raised the central bank’s benchmark lending rate to a range of 5-5.25%, the highest level in more than 15 years.
Some officials have said a pause would allow them to assess the impacts of the central bank’s most aggressive rate-hiking campaign since the 1980s and some have also cautioned of additional factors expected to further slow economic activity, such as tougher lending standards, along with other lagged effects of tighter monetary policy. Many economists, including those at the Fed, still expect a recession later in the year.
That’s essentially the argument for a pause. President Joe Biden’s pick to be the Fed’s second-in-command said as much on Wednesday, but cautioned that it doesn’t mean the Fed can’t resume rate increases if needed.
“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,” said Federal Reserve Governor Philip Jefferson at a conference in Washington, DC, this week. “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.”
Federal Reserve Bank of Philadelphia President Patrick Harker echoed Jefferson’s view this week that it would be appropriate to vote for a pause in June because of factors already pulling on the economy’s reins.
“I do believe that we are close to the point where we can hold rates in place and let monetary policy do its work to bring inflation back to the target in a timely manner,” Harker said Thursday during a moderated virtual discussion hosted by the National Association for Business Economics. “We should at least skip this meeting in terms of an increase. We can let some of these things resolve themselves, at least to the extent they can, before we consider — at all — another increase.”
It’s still possible that the Fed could hike rates later this month, mostly if the latest Consumer Price Index to be released on the first day of the Fed’s two-day policy meeting shows that inflation accelerated in May.