Fed Speakers Sound Hawkish But Traders Do Not Believe Them

Key Insights

• Fed speakers say that it’s too early to celebrate victory over high inflation. 
• The Fed may have to keep rates at high levels for months to push inflation closer to the target. 
• The market believes that Fed will be forced to cut rates in the second half of the year to provide additional support to the economy. 

Traders Expect That Fed Will Cut Rates In 2023

On May 15, traders focused on the comments from Fed officals who shared their views on the current situation in the economy.

Atlanta Fed President Raphael Bostic said that he did not expect to see any rate cuts this year. In fact, Bostic believes that Fed may have to raise rates if inflation remains at high levels.

Minneapolis Fed President Neel Kashkari noted that a few months of good data were not sufficient to determine whether inflation was under control. According to Kashkari, there’s a long way to go before Fed reaches its inflation target.

The FedWatch Tool indicates that there is 76.4% probability that Fed will leave the interest rate unchanged at the next meeting in June. Unlike Fed speakers, traders expect that Fed will cut the interest rate from 500 – 525 bps to 425 – 450 bps by the end of this year.

Traders Should Keep An Eye On Debt Ceiling Negotiations

The comments from Fed speakers did not provide any material support to the U.S. dollar, which pulled back against a broad basket of currencies. Gold  moved higher as traders focused on the U.S. debt ceiling story.

In the near term, debt ceiling negotiations could serve as the main catalyst for markets, so comments from Fed speakers may have less impact on market dynamics. While most analysts believe that U.S. will come up with a last-minute solution to the debt ceiling problem, traders should be prepared for additional volatility in the upcoming weeks.

For a look at all of today’s economic events, check out our economic calendar.