Will the US Federal Reserve throw a surprise for the stock markets on June 14?

The surprise rate hike by the Bank of Canada by 25 basis points has fanned speculation that the US Federal Reserve will continue to remain aggressive. The Federal Reserve and the European Central Bank will make policy decisions next week, with the Fed signalling that it may suspend rate hikes in June before restarting them later.

After a five-month break, the Bank of Canada has resumed interest rate hike and another raise may not be ruled out in July. Previously, the Reserve Bank of Australia defied market expectations by raising its benchmark rate. Economists overwhelmingly expected the central bank to keep interest rates unchanged.

“The markets are already pricing-in a pause but I also believe that the Fed can adopt a wait-and-watch policy here. They’ve hiked rates consistently so far and the May jobs data is, at best, giving mixed signals. So it’s entirely possible that the Fed doesn’t do a hike this time but hikes it (rather than reducing) the next time. A pause, on the other hand, would generally imply that subsequently there will be a rate reduction – I don’t expect that just yet,” says says Sitashwa Srivastava, Co-founder & Co-CEO, Stockal, a Global Investing Platform helping investors from India to invest in US stocks.

Hawkish words by Federal Reserve officials recently boosted expectations that interest rates will remain higher for a longer period of time. In the most recent comments, Fed Chairman Bullard hinted that rates could be raised by another half-point this year, while Fed Vice Chairman Kashkari portrayed the decision to halt or raise rates in June as a tight call.

“As Fed Chair Jerome Powell signaled for a pause soon in his last month commentary, the Federal Reserve is expected to take a hawkish pause and is expected to keep interest rates unchanged in the June meeting and may go for a rate hike later,” says Shrey Jain Founder SAS Online – India’s Deep Discount Broker.

The argument for a June rate hike strengthened following recent stronger-than-anticipated core PCE print, and the employment report, since recent prints have highlighted the labour market’s resilience.

“The Fed needs to now decide whether to continue fighting inflation or give time for actions to show their effect. Even if the rates are maintained in June, it will be a pause rather than a halt weighing the current scenario and warrants a hike in July. The Fed is grappling with unpredictable possibilities going ahead and the June decision definitely is a tough call,” says Aditya Gaggar, Director of Progressive Shares.

Markets are currently pricing in a pause in the rate hiking cycle next month, while bets on interest rate reduction this year are being reduced. What the US Fed does in its next FOMC meeting on June 13-14 will hold importance for the global markets.

Raising the fed funds rate too far may limit economic development to the point that the US enters a recession with considerable job losses. Significant Fed rate hikes have historically resulted in recessions, but the economy has shown remarkably robust in this cycle.

The FOMC decision will be revealed on June 14 and the US Fed is largely expected to keep its benchmark fed funds rate unchanged at its target range of 5-5.25%. Skipping a rate hike at the June meeting would allow the FOMC to gather more data before deciding on the amount of any policy tightening. As a result, the upcoming jobs, consumer spending, and core inflation date for May 2023 become extremely critical to consider.