Fed rate hike still likely at June FOMC meeting followed by a "pause"

Fed funds futures now indicate a near-certain belief that the Fed will hike to 5.50% in August before pausing its interest rate hike campaign, but it's still a bit premature to accept that belief as gospel. My assessment remains that the Fed is more likely to pause after June's hike to 5.25% than to continue hiking. The data in July will be determining whether the Fed does or doesn't hike in August. There is of course the possibility that the July data could continue to show excessive inflationary pressure, but it could easily trend the other way as well. It's simply premature to judge July. Besides it is actually too soon to judge the cumulative effect of the rise of interest rates over the past year.

Although recent inflation data has not been so benign, the effects of energy and commodity price hikes earlier in the year are likely to moderate and dissipate somewhat in the coming months, giving the Fed a little breathing room, for now. Commodities prices have continued to moderate lately after the recent run-up, which was driven primarily by feverish speculation rather than actual real demand growth by end users.

As always, the last hike indicated by futures prices (i.e., the likely hike in August) is usually an insurance hedge rather than an outright bet.

The economy is hanging in there nicely, neither booming nor busting. Goldilocks would be proud of the Fed.

-- Jack Krupansky