Fed may be forced to defy market expectations and hike more aggressively, economist says

The U.S. Federal Reserve whitethorn beryllium forced to defy marketplace expectations by hiking involvement rates aggressively again aboriginal this twelvemonth if sticky ostentation and choky labour markets persist, according to Daniele Antonucci, main economist and macro strategist astatine Quintet Private Bank.

Having hiked by 25 ground points to instrumentality the Fed funds complaint into the 5%-5.25% people scope earlier this month, the marketplace is pricing astir a 60% probability that the cardinal slope pauses its monetary tightening rhythm astatine its June meeting, according to the CME Group's Fed Watch tracker of prices successful the fed funds futures market.

The Fed has been hiking rapidly implicit the past twelvemonth successful a bid to rein successful sky-high inflation, but the marketplace expects policymakers to statesman cutting rates earlier the extremity of the year. Annual headline ostentation fell to 4.9% successful April, its lowest for 2 years, but remains good supra the Fed's 2% target.

Meanwhile the labour marketplace remains tight, with jobless claims rising but inactive astatine historically debased levels. Job maturation besides deed 253,000 successful April contempt a slowing economy, portion unemployment sat astatine 3.4%, its joint-lowest level since 1969. Average hourly net roseate 0.5% for the period and accrued 4.4% from a twelvemonth ago, some higher than expected.

Antonucci told CNBC's "Squawk Box Europe" connected Friday that Quintet disagrees with the market's pricing of complaint cuts aboriginal successful the year.

"We deliberation this is simply a hawkish intermission — it's not a pivot from hawkish to dovish — it's a pause, the level of ostentation is high, the labour marketplace is tight, and truthful markets tin beryllium disappointed if the Fed doesn't little rates," helium said.

Given the spot of the labour market, Antonucci suggested that a complaint chopped "seems an implausible script and it is lone the archetypal issue."

"The 2nd 1 is that the hostility present is that if the labour marketplace remains strong, if economical enactment doesn't yet deteriorate to a constituent to person a recessionary situation and disinflation, the Fed whitethorn person to tighten argumentation much aggressively and past you person a recession including an net recession," helium added.

"The Fed whitethorn request to hike much aggressively if ostentation stays elevated."

Antonucci's presumption mirrored messaging from immoderate members of the Federal Open Market Committee (FOMC) this week, who person reiterated the value of waiting to show the lagged effect of anterior complaint hikes but besides indicated that the information does not yet warrant a dovish pivot.

Cleveland Fed President Loretta Mester said Tuesday that the cardinal slope is not yet astatine the constituent wherever it tin "hold" rates, portion Dallas Fed President Lorie Logan suggested connected Thursday that the information truthful acold does not warrant skipping a complaint hike astatine the June meeting.

Investors volition beryllium intimately watching a code from Fed Chairman Jerome Powell connected Friday for clues arsenic to the FOMC's imaginable trajectory.

"Jerome Powell has been peculiarly captious of the 'stop and go' monetary argumentation successful the 1970's that contributed to the stagflationary underpinning of the economy, and which required an assertive monetary argumentation to reconstruct terms stability," said Quincy Krosby, main planetary strategist astatine LPL Financial.

"If helium mentions this erstwhile helium speaks connected Friday, the marketplace could construe it arsenic awesome that unless the information improves markedly regarding inflation, he'll advocator different complaint hike."

Krosby added that the week's "Fedspeak chorus" has served to punctual markets that the cardinal bank's mandate is to reconstruct terms stability, and that the FOMC is prepared to rise rates again to "get the occupation done if ostentation doesn't cooperate."