Federal Reserve policy-makers got a dose of unexpectedly strong economic data on Friday that bolstered the case for further monetary policy tightening to slow the economy and bring down persistently high inflation.
Consumer spending surged 0.8 per cent last month from March, the Commerce Department reported.
Inflation by the Fed’s preferred gauge accelerated to 4.4 per cent from a year ago, with core prices – a key measure of the trajectory – gaining 4.7 per cent, up from the 4.6 per cent pace in March.
The Fed targets 2 per cent inflation. Fed Chair Jerome Powell earlier this month signalled it may be time for the central bank to pause its rate-hike campaign after 10 straight months of increases. But he and others said they will keep a watchful eye on data.
That robust data, along with what appeared to be some progress on a deal to raise the debt limit and avoid a catastrophic default, pushed traders of futures contracts tied to the Fed policy rate to bet the Fed is not done raising interest rates.
“Inflation remains stubborn,” said Art Hogan, chief market strategist at B Riely Wealth. “It feels like we’re getting the debt ceiling drama close to the finish line, but we still have to be concerned about what’s next for the Fed.”
Implied yields on the contracts now show traders see about a 60 per cent chance the Fed will increase its target range for the benchmark rate, currently at 5 per cent-5.25 per cent, by a quarter of a percentage point at its June meeting. Earlier in the day the contracts were pricing in about a 60 per cent chance the Fed would skip a June rate hike.