Most of the economists participating in Wolters Kluwer Blue Chip Economic Indicators panel expect the Federal Open Market Committee to eventually resume an easing of short-term rates.
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However, the share in its June survey expecting the next FOMC move to be an increase grew by 15 percentage points
The survey was taken prior to Wednesday’s release of the May Consumer Price Index data. Inflationary pressures have led some economists, including those at the Mortgage Bankers Association, to predict the
But respondents in the June Wolters Kluwer report are now viewing the upside risk of inflation in the U.S. greater than
“At the same time, many panelists remain hopeful that price pressures will not linger,” the Wolters Kluwer report said. “In the U.S., panelists expect the price index for personal consumption expenditures to increase 4.9% in the second quarter, but they see it dropping to 2.8% in Q3 and gradually easing to 2.2% by the end of the forecast horizon.”
Data from the May CPI report
The May CPI rose 0.5% on a month-to-month basis, compared with 0.6% in April. The seasonally adjusted annual increase was 4.2%, the highest in three years.
Energy was responsible for over 60% of the monthly increase, the Bureau of Labor Statistics said. Taking out food and energy, the CPI was up 2.9% over the 12-month period.
“Just because the inflation numbers came in consistent with expectations doesn’t mean they are good,” said Nigel Green, CEO of financial advisors the deVere Group, in a press release.
“Indeed, it’s the first major inflation test facing newly installed Fed Chair Kevin Warsh, strengthens the case for a more hawkish central bank, and leaves investors dangerously exposed if they continue to underestimate the inflation threat.”
Warsh understands
“Markets are being forced to abandon the comfortable assumption that lower rates are around the corner,” he said. “Investors are steadily pushing back expectations for policy easing and, increasingly, are having to consider the possibility that the next move from the Fed is not down but up.”
The core inflation data should provide the markets with assurance the causes behind rising prices has not reaccelerated the overall picture, Odeta Kushi, deputy chief economist at First American Financial, said in a statement.
What is happening with the U.S. economy cuts both ways for housing, she said.
Housing is sustained by a resilient labor market supporting household formation, income growth and increased consumer confidence.
“Persistent inflation, however, is likely to keep Treasury yields elevated and delay mortgage-rate relief,” Kushi said. “Mortgage rates are driven more by inflation expectations and bond market conditions than by the federal funds rate itself, and today’s report offers little reason to expect a significant decline in borrowing costs in the near term.”
The 10-year Treasury yield, one of the benchmarks for the 30-year fixed rate mortgage, seemed to have already priced in the expectations from the CPI data. It closed on June 9 at just below 4.53% and by 11 a.m. eastern time the following morning, it was around 4.52%.
Consensus still leaning towards Fed easing through 2027
The BCEI panel now expects the federal funds rate to reach 3.56% at the end of the year, which is 6.5 basis points lower than the current level. The group on a consensus basis expects a 3.32% FFR by the end of 2027.
None of the panelists are expecting the FOMC to make a change at the upcoming June meeting,
The biggest shift is in September, where now just 4% of the BCEI expects the Fed to make a move, down from 22% in the May report. Meanwhile the later response grew to 93% from 73%.
While over three-quarters of the respondents still expect the Fed to cut rates when it does act, 24% are now in the hike column. This compared with 9% for both the April and May surveys.
The survey also found the consensus belief of the probability of a U.S. recession in the next 12 months is now at 33%, compared with 35% in the May survey.