Will the Federal Reserve hike interest rates at its next meeting in June — for the 11th time in a row — or pause? Wall Street seems to be betting on the latter, but it was a topsy-turvy journey to that consensus last week.
What happened: The Fed's meeting earlier this month fueled hopes that it was done with rate hikes, at least for now. Then, a slate of economic data last week came in stronger than expected.
Retail spending rebounded in April after two months of declines, suggesting that consumers are still spending despite tightening their purse strings. Jobless claims declined more than expected for the week ended May 13, staying below historical averages.
Traders saw a roughly 36% chance last Thursday that the Fed will raise rates by another quarter point in June, up from around 15.5% on May 12, according to the CME FedWatch Tool.
Then, Fed Chair Jerome Powell weighed in mid-morning Friday. In a panel with former Fed head Ben Bernanke, Powell said that uncertainty remains surrounding how much demand will decline from tighter credit conditions and the lagged effects of hiking rates. Traders pared down their expectations to about a 18.6% chance that the central bank will raise rates next month, as of Friday evening.
Experts seem to agree that the Fed is unlikely to raise rates again in June. "The absence of any such preparation [for a raise] is the signal and gives us additional confidence that the Fed is not going to hike in June absent a very big surprise in the remaining data, though we should expect a hawkish pause," Evercore ISI strategists said in a May 19 note.
Jim Baird, chief investment officer at Plante Moran Financial Advisors, also expects the Fed to hold rates steady in June. But that decision isn't set in stone, and the Fed will likely monitor three key factors in making its decision, he said. Those are:
The debt ceiling. President Joe Biden and congressional leaders have maintained that the US will likely not default on its debt. But if such a scenario were to happen, it could have catastrophic consequences for the economy and financial markets that would require the Fed wait for the crisis to be resolved before taking action.Evolving financial conditions. The collapses of regional lenders Silicon Valley Bank, Signature Bank and First Republic have accelerated the tightening of credit conditions. While that has complicated the Fed's plan to stabilize prices, it also could benefit the central bank by doing some of its work for it by slowing spending.Delayed impact. The Fed's interest rate hikes flow through the economy with a lag. So, it will take some months for the full effect of its aggressive tightening cycle to show up in the economy. That means the Fed could want to take a pause to monitor the continuing impact of what it has already done.
The Fed has also maintained that its actions are data dependent, meaning it will keep close watch on economic data that comes in before it's due to announce its next rate decision on June 14.
Some key data points set for release before then include the April Personal Consumption Expenditures price index (that's the Fed's preferred inflation metric), May jobs report, the May Consumer Price Index and May Producer Price Index. (The latter two reports are due on the two days the Fed meets.)
If these data points show considerable weakening in the labor market or continued declines in inflation, that helps make the case for a pause. But signs of a robust economy with little to no signs of slowing down could mean the Fed has more room to tighten — and that it could take that opportunity.
Morgan Stanley chief executive to step down
Morgan Stanley chief executive James Gorman, 64, will step down from his role within the next 12 months, he said Friday at the bank's annual meeting.
"The specific timing of the CEO transition has not been determined, but it is the Board's and my expectation that it will occur at some point in the next 12 months. That is the current expectation in the absence of a major change in the external environment," Gorman said.
Gorman, who is one of the longest-serving heads of a US bank and largely responsible for helping lead a sweeping transformation of the company after the 2008 financial crisis, became CEO in January 2010.
He will assume the role of executive chairman for "a period of time," Gorman said, adding that the board of directors has three senior internal candidates in the pipeline to potentially take over as the next chief executive.
Read more here.
Jamie Dimon's 'war room' sessions ramp up
The June 1 'X-date' — the estimated point at which the US Treasury could run out of cash — is fast approaching. For JPMorgan Chase's Jamie Dimon, another key date is already here.
The chief executive told Bloomberg earlier this month that he has held a so-called "war room" weekly to prepare the bank for the possibility the United States defaults on its debt. He plans to meet more often as the X-date approaches, and then meet every day by May 21, he said, adding that the meetings will eventually ramp up to take place three times a day.
"I don't think [a default] is going to happen, because it gets catastrophic," Dimon said. "The closer you get to it, you will have panic."
Debt ceiling negotiations appeared to be going in a positive direction for most of last week. Both President Joe Biden and House Speaker Kevin McCarthy said that the United States is unlikely to default on its debt and seemed optimistic about the path to a deal.
But debt ceiling talks between the White House and McCarthy's office have hit a snag, and negotiators put a pause on the talks, multiple sources told CNN Friday.
While that doesn't mean the negotiations are falling completely apart, or that the country is headed for a default, it does pose more challenges for the stock market, which has stayed relatively resilient despite debt ceiling worries starting to slowly creep in.
Dimon said in the same Bloomberg interview that he'd "love to get rid of the debt ceiling thing" altogether.
The debt ceiling situation "is very unfortunate," he said. "It should never happen this way."
Up next
Monday: JPMorgan Chase investor day.
Tuesday: April new home sales. Earnings from Lowe's (LOW).
Wednesday: May Fed meeting minutes.
Thursday: GDP Q1 second read, April pending home sales, mortgage rates and weekly jobless claims. Earnings from Costco (COST), Dollar Tree (DLTR) and Best Buy (BBY).
Friday: April Personal Consumption Expenditures and May University of Michigan final consumer sentiment reading.
