Markets have begun factoring in an interest rate pause ahead of the June FOMC meeting. Citi Economist Veronica Clark sits down with Yahoo Finance Live to explain why she doesn't think that is going to be the case. Clark believes the Fed will raise rates at both their June and July meetings.
- The comments from Phillip Jefferson and Patrick Harker sparking a major swing in the Fed fund futures. Earlier today, the likelihood of a rate hike in June sat at more than 70%. And now we're at less than 30%. Our next guest, though, has been expecting rates to rise at both the June and July Fed meetings and still has that as her base case. Let's bring her in. We want to talk to Veronica Clark, a Citi economist. Veronica, it's great to see you here. So you still think to rate hikes are warranted. Why?
VERONICA CLARK: Yeah, I do. I would be cautious with some of the Fed comments that we got today. I think this is a really genuinely data dependent Fed at this point. We do, of course, still have a jobs report on Friday, CPI right ahead of the June decision. If we believe that the Fed is truly data dependent, then our Fed funds forecast comes down to what we think we're going to see in the data. It comes down to our inflation forecast, our jobs forecast. And we still see a lot more persistence to inflation than I think the Fed does. And that means rates still need to rise more.
- So you still-- yes, you said the Fed is data dependent. But you have a couple of voices coming out today and kind of signaling the expectations for pause. That really doesn't change your base case at all or give you pause to that thinking?
VERONICA CLARK: Yeah. They were definitely dovish comments I think relative to what we were pricing this morning. I think this is a Fed that if they're data dependent, then the chance of a hike at any given meeting should be dependent on the data. And we were pricing close to 20 basis points for the June meeting this morning after we had those strong job openings numbers. If you want that to be more like 50/50, I think maybe that's what Fed officials were trying to do now, really let it be swayed by the data that we're going to get on Friday and on June 13.
- Veronica, what about the risk of recession? Many people are warning that, hey, we might want to pause, see how things play out, and not just some Fed officials. We also heard it from a number of economists. What does this do, though, if we do see two rate hikes in the month of June and the month of July? What does that do in terms of the odds of a recession and what that could potentially look like?
VERONICA CLARK: Yeah. We do have a mild recession in our base case, really, for the end of this year, although I think everyone has been pushing out their expectations for when a recession might come. We have just seen a lot of resilience in the labor market, in activity and consumption. But we are expecting that to happen later this year. But it comes down to we're trusting that the Fed is going to do what it takes to get inflation lower. And from our standpoint, rates aren't quite restrictive enough. And getting them restrictive enough, yeah, does cause a weakening in the labor market, does cause a recession. But it, importantly, is enough to bring inflation back to 2%.
- Veronica, you mentioned a few times that inflation remains. You expect it to be pretty sticky here, persistent. I guess how sticky do you expect some of these higher prices to be? When we look out to the end of the year, what do you think that inflation number most likely will be right around?
VERONICA CLARK: Yeah. I think a lot of the inflation data gets a little bit tricky, a little bit more nuanced here. We've seen the slowing in goods prices. That's related to supply chains correcting. Shelter prices are starting to come down now. But the really sticky part of inflation, which is only about a third or so of core CPI inflation, but over half of the Fed's measure PCE inflation, which is those non-shelter services, those can stay really strong. Our forecast for core PCE inflation, which the Fed is going to have to update their own forecasts in a couple of weeks, is for 4.2% still for the end of this year. The Fed's forecast is very likely going to come up in June. Their last at 3.6%. We're still much higher than that.
- Veronica, so the consumer has consistently been the backbone of the economy. Consumer spending has held up. But one of the things that we've been looking at is the potential impact to consumer spending resulting from this debt ceiling deal that's going to be voted on later today. And one of the points in there is the pause on student loan payments will go away, basically. What do you expect to be the ripple effect, the economic ripple effect, to consumer spending resulting from people having to pay their student loans again?
VERONICA CLARK: Yeah. It should probably weigh on consumption maybe just by a couple of tenths from some rough numbers. I think most importantly, though, for consumption, we have had some excess savings that are still going out. But most importantly is that the labor market is still really strong. People are still employed, still earning a higher nominal wage than they were a couple of years ago. That's really what is still supporting consumption here. And until that labor market story changes, I wouldn't expect, actually, a real big drag on consumption.
- What are you expecting from the jobs report this Friday?
VERONICA CLARK: We have a 200k payroll forecast. The unemployment rate staying low at 3.4%. Wages, average hourly earnings, rising about 0.3, but with some upside risk there.
- Veronica, I know we're jumping all over here, but bringing you back to how the Fed is looking at this data that we're getting out, that home price number that we got out earlier this week rising for two months in a row, how problematic do you think that is for the Fed?
VERONICA CLARK: Yeah. We had some interesting comments this morning from Fed Governor Bowman about housing, which is a new upside risk maybe to inflation. Home prices specifically are not an input into consumer inflation measures. It's shelter prices that are measured by rents. But if housing demand is bottoming, which it seems like it is, and housing supply could still be pretty limited, people are hesitant to sell homes and relinquish lower mortgage rates, there could be upward pressure on prices still. And there's some limit then into how much shelter prices might ease. They probably still do for another six months or so. But there could be some floor there. And it is probably a new upside risk that the Fed should be a bit worried about.
- And speaking of what the Fed should be worried about, what would change your view about what the Fed would do? Would it be the jobs picture happening this Friday change what you're thinking? I mean, you said that this is obviously a data dependent Fed. What changes your expectations for the Fed's meeting in June and July?
VERONICA CLARK: Yeah. It absolutely will come down to the data for us also. There's certainly a weak enough number that we could see on Friday. That might do it. Maybe something less than 100,000. I think the market is maybe expecting that we need an upside surprise to payrolls, an upside surprise to CPI that we'll get on June 13. I would think that maybe the bar is a bit lower for how strong the data might be for the Fed to still be hiking because they're going to have to update their forecasts and June. And they'll have to update them in a way that shows stronger activity, stronger inflation, and that should mean higher rates still too.
- Great insight. Veronica Clark, Citi economist, our thanks to you.