It seemed like just yesterday that markets were confident that a harder Federal Reserve would raise interest rates by half a percentage point at its meeting less than two weeks from now.
That’s because it was actually yesterday. On Thursday, futures traders were almost certain that the Fed would tighten monetary policy, doubling the quarter-point hike approved last month.
But one bank implosion and one co-op job report later, and the market has changed its mind.
The likelihood of a 0.25 percentage point gain rose to over 70% at one point in morning trade, according to CME Group, suggesting a temporary bout of Fed-induced panic had passed.
“Overall, the data does not support a 50th [basis point] Fed hiked rates on March 22 despite strong payroll advance,” said Kathy Bostjancic, chief economist at Nationwide.
Nonfarm payrolls rose by 311,000 in February, well above Wall Street’s estimate of 225,000 but still down from January’s 504,000.
Perhaps more importantly, average hourly earnings rose just 0.24% this month, up 4.6% year-on-year, below the 4.8% estimate. It’s a key metric for the inflation-fighting Fed, which no doubt has been watching Friday’s Labor Department report as closely as it will be monitoring February consumer and producer prices next week.
“The Fed can take solace in rising labor supply and easing upward pressure on wages to hold 25 level [basis point] Rate hike,” added Bostjancic. One basis point is 0.01 percentage point.
Economists at both Bank of America and Goldman Sachs agreed, saying Friday morning they were behind forecasts for a quarter-point hike at the Federal Open Market Committee’s May 21-22 meeting. stand in March. Both banks used the phrase “close call” in their forecasts, noting that next week’s data will play a big role in the Fed’s final decision.
“The February report was on the softer side overall,” Michael Gapen, chief US economist at Bank of America, said in a note to clients. “While payrolls have beaten our expectations, the rise in the unemployment rate and relatively weak average hourly earnings data point to a slightly better balance between labor supply and demand.”
What made the move to 25 basis points notable was that the prospects for a 50 basis point move topped 70% at one point on Thursday, as measured by the CME’s FedWatch gauge for trading federal fund futures contracts. This followed comments from Fed Chair Jerome Powell, who told Congress this week that the central bank would likely cut rates faster and higher than previously expected if inflation data didn’t ease.
However, these prices started amid a sharp fall in stock markets and fears that the collapse of the Silicon Valley bank could portend financial sector contagion. The move towards the quarter point probability became more pronounced on Friday morning, although trade was volatile and the move gained half a point of momentum.
“The 50 basis point drop in ratios was hard to separate from the SVB collapse,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “That’s got to be in the Fed’s mind: is that the thing that’s going to break?”