The Fed is not currently expected to join the ECB in further hiking interest rates on Wednesday, but it may depend on Tuesday’s US inflation figures due at 1.30 pm UK time.
At present, the Fed is expected to keep rates at 5.25%, with chair Jerome Powell strongly hinting back in the early May meeting that after raising rates from near zero over the past 14 months, policymakers could pause at the June meeting.
Initially, this led to markets anticipating rate cuts for later in the year, before subsequent economic data showed inflation continuing to run hot and the jobs market remaining solid.
Furthermore, Australian and Canadian central banks surprisingly hiked rates last week.
“Hawkish comments from a few Fed officials have added to the sense that they may not be done,” said economists at ING.
Markets are currently pricing a 33% chance of a 25bp hike next week, he noted, while only around one in ten economists are looking for an increase.
The ING team predicts a “hawkish hold, with the central bank leaving the door open to additional hikes if inflation fails to show signs of softening and the jobs market remains hot”.
If Tuesday’s core consumer price inflation comes in above the 0.4% consensus forecast, then ING says “the odds would likely swing in favour of a hike on Wednesday, as the measure would be heading in completely the wrong direction”.
Philip Marey, strategist at Rabobank, said Powell’s bias toward a pause in June leads to an expectation that the FOMC will keep things largely unchanged this month but the stronger economic data has “already convinced about half of the FOMC that additional rate hikes are warranted”.
He added: “Because of the reacceleration of the economy, and the modest impact of the banking turmoil on credit conditions, we now expect the FOMC to resume the hiking cycle in July in order to get inflation under control. For now, we expect one rate hike of 25 bps before the FOMC takes a pause for the remainder of the year.”