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Will the Federal Reserve raise interest rates in June for the 11th consecutive time or will it pause at this meeting? Wall Street is betting on the latter but last week was a rollercoaster ride.
What happened? The Fed meeting held earlier this month gave rise to the hope that rate hikes were over, for now. Last week, economic data came in better than expected.
Retail spending bounced back in April following two months of declines. This suggests that consumers continue to spend despite their tightened purse strings. The number of jobless claims decreased more than expected in the week ending May 13 and remained below historical averages.
According to the CME FedWatch Tool, traders saw an approximately 36% chance that the Fed would raise rates another quarter point by June. This is up from about 15.5% on 12 May.
Fed Chair Jerome Powell then weighed in at mid-morning on Friday. Powell, who was on a panel alongside former Fed chief Ben Bernanke at the time, said there is still uncertainty about how much demand may be affected by tighter credit and delayed effects of rate hikes. As of Friday night, traders reduced their expectations for the central bank to an 18.6% chance.
Experts appear to agree that it is unlikely the Fed will raise rates in June. The absence of such preparation is a signal that gives us more confidence in the Fed's decision not to raise rates in June, barring a major surprise in the remaining statistics. We should, however, expect a hawkish delay, Evercore ISI analysts said in a note on May 19.
Jim Baird is the chief investment officer of Plante Moran Financial Advisors and he also believes that the Fed will hold rates constant in June. The Fed is likely to monitor three factors when making its decision. These are:
The debt ceiling. The US is unlikely to default on its debt, according to President Joe Biden. Financial conditions are changing. Credit conditions have tightened due to the collapse of regional lenders Silicon Valley Bank Signature Bank and First Republic. Delayed effect. Fed interest rate increases are absorbed by the economy at a slow pace. It will take a few months before the full impact of the Fed's aggressive tightening cycle is felt in the economy. The Fed may want to take some time to assess the impact of its actions.
The Fed also stated that it is data-dependent, which means it will closely monitor the economic data before its next rate announcement on June 14.
The Fed will release key data before that date, including the April Personal Consumption Spending price index (the Fed's preferred inflation measure), the May jobs report and the May Consumer Price Index. The Fed will meet on two of the days that the latter two reports must be submitted.
These data can be used to support a pause if they show a significant weakening of the labor market, or a continued decline in inflation. Signs of a strong economy, with few signs of slowing could indicate that the Fed still has room to tighten.
Morgan Stanley Chief Executive Steps Down
Morgan Stanley's chief executive James Gorman will retire within 12 months. He announced this Friday at the annual meeting of the bank.
The Board and I do not know the exact timing, but we expect it to happen within the next year. Gorman stated that this is the current expectation, in the absence a major shift in the external environment.
Gorman became CEO of the bank in January 2010, after serving as one of its longest-serving leaders and being largely responsible for leading a transformational change of the firm following the financial crisis of 2008.
Gorman stated that he will be the executive chairman of the company for "a period of time". He added that three internal candidates are in the pipeline who could take the position of the next CEO.
Jamie Dimon's war room sessions are ramping up
The 'X-date,' or the estimated date at which US Treasury will run out of money on June 1, is rapidly approaching. Jamie Dimon of JPMorgan Chase is aware that another important date has already arrived.
Bloomberg reported earlier this month that the chief executive had held weekly a 'warroom' to prepare the bank in case the United States defaulted on its debt. He said he would meet more frequently as the X date approaches and every day on May 21.
Dimon stated that he did not believe a default would occur because it could be catastrophic. The closer you are to the default, the more panic you will feel.
The debt ceiling negotiations seemed to be moving in the right direction during most of the last week. Both Joe Biden, the President of the United States and Kevin McCarthy, the Speaker of the House said that it is unlikely the United States will default on its debt. They both seemed optimistic regarding the way to a deal.
Multiple sources told CNN that the debt ceiling talks between McCarthy's office and the White House have hit a roadblock and the negotiators paused the discussions.
The stock market has been relatively resilient, despite the debt ceiling concerns that have started to creep in.
Dimon stated in the same Bloomberg Interview that he would 'love' to get rid of debt ceilings altogether.
He said that the debt ceiling situation was'very unfortunate'. It should never have happened this way.