Could the Fed pause next week? It's not out of the question.

By Greg Robb

Economists make case for interest holding rates steady in May while signaling an intention to hike in June

Could the Federal Reserve pause next week after nine straight interest-rate hikes?

The idea which seemed unthinkable to many economists now seems to be gaining some traction.

MarketWatch economic calendar:GDP and jobless claims joined by pending home sales on Thursday's data docket

At the start of the week, derivative markets were pricing in a 90% chance of a rate hike next week.

"We think this is too high," said Steve Englander, head of North America Macro Strategy at Standard Chartered, in a note to clients. "We see strategic as well as well as tactical reasons for a hawkish pause in May followed by a hike in June unless upcoming data confirm that a slowdown is already in place."

The strategic reason for pausing is that there has been a limited amount of economic data since the Fed's policy meeting in late March. The Fed can say that it is worth getting more information and then deciding what to do.

"It is worth waiting to see the dust settle a bit and see where we are," Englander said.

The Fed has pushed up its policy interest rate high enough that it now has the space to wait and see, he said.

The tactical reason for a pause in its rate-hike cycle in May while pointing to a possible rise in June is that it stops the market from quickly moving from the notion that this is the last hike to debating the day of the first rate cut.

"A May pause would enable the FOMC to hike in June and signal risk of a further hike through [its economic forecast], if that were the policy direction," Englander said.

At the moment, the conventional wisdom is that the Fed will raise target rates by 25 basis points in May and signal a pause in June. The chances of a pause are only 25%, based on market forecasts.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said it would be a "massive surprise" if the Fed pauses.

Some economists have detected some support for a pause, though.

"While a few Fed officials hinted this week that they would prefer to pause, a majority still appear to favor at least one additional rate hike," said Ryan Sweet, chief U.S. economist at Oxford Economics.

Krishna Guha, vice chairman of Evercore ISI, said this week's woes at First Republic Bank(FRC) could unfold in a manner over the next few days that would lead the Fed to skip a rate rise in May while signaling a hike in June.

Brian Bethune, an economics professor at Boston College, said he thinks that inflation is cooling enough that the Fed can pause. "The spike in commodity prices has unraveled. I don't think we're going to have that ongoing problem," Bethune said.

"If I were on the FOMC, I'd vote for an immediate pause. There is some chance they may have overtightened," he added.

On the positive side, "there is a much higher probability that the Fed can engineer a soft landing than there was three or six months ago," Bethune said.

Stocks were mixed in afternoon trading on Wednesday. The yield on the 10-year Treasury note rose to 3.45%.

-Greg Robb

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04-29-23 1143ET

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