Even though Federal Reserve interest rate expectations have receded to little more than one cut over the remainder of the year, broader financial conditions captured by the Chicago Fed index are at their easiest since November 2021 – four months before the Fed began its tightening campaign.
This leaves the Fed with an ongoing conundrum as to whether its restrictive monetary policy has been enough to drag inflation durably back to its 2% target as economic growth keeps humming. Annual core PCE inflation is expected to have held at 2.8% in April – even if monthly price gains eased a touch to below 0.3%.
Although on the hawkish side of the Fed’s policymaking council, Minneapolis Federal Reserve Bank President Neel Kashkari on Tuesday continued to hold out the possibility of another rate hike if necessary.
And if it is not needed, Kashkari said it would take “many more months of positive inflation data” to give him confidence enough to ease.
Another hawk, Fed board governor Michelle Bowman, even said she would have supported either waiting to start slowing the run-off in the U.S. central bank’s balance sheet or a more moderate tapering process than announced earlier this month.
Despite all that, and awaiting another heavy week of debt sales, Treasury yields edged lower on Tuesday. Two and five-year notes come under the hammer later in the day.
Both stock and bond market volatility gauges remain subdued.
Although the U.S. economic surprise index remains in negative territory, it has picked up considerably since last week’s punchy May business surveys and the Atlanta Fed’s real-time economic growth estimate is tracking 3.5% for the quarter.
Oil prices too picked up a touch on Tuesday ahead of Sunday’s online meeting of OPEC+ producers, where traders expect 2.2 million barrels per day of voluntary production cuts to stay in place.
