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- The Fed’s preferred inflation gauge, annual core PCE, stood at 4.7% in April.
- The Federal Reserve now possesses increased flexibility to implement further interest rate hikes this year.
To bring inflation under control, the International Monetary Fund (IMF) advises the United States Federal Reserve to maintain higher interest rates for an extended period. The IMF also recommended that the Biden administration adopt stricter fiscal policies to reduce the national debt. Under these conditions, the Fed is expected to raise interest rates by 25 basis points in June.
IMF Managing Director Kristalina Georgieva recently stated that the annual appropriations process is not the sole mechanism through which the U.S. Congress can constrain debt. Members of the U.S. Federal Reserve are unanimous in their view that the Federal Open Market Committee (FOMC) must continue raising federal funds rates until they exceed 6%. The federal funds rate is currently floating between 5% and 5.25%.
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Greater Flexibility to Raise Rates
The Fed’s favored measure of inflation, annual core PCE, came in at 4.7% in April, up from the predicted 4.6%, as reported on Friday. The labor market remains highly competitive. Consequently, the Federal Reserve now has greater flexibility to raise interest rates further this year.
In June, a rate rise of 25 basis points is viewed as more likely by the market. The CME FedWatch Tool predicts a 64% probability of a 25 bps rate hike by the Fed in June, up from 17% a week ago.
The final details of the bipartisan Biden-McCarthy debt limit agreement will be finalized before the looming debt default deadline. The U.S. Treasury’s cash position has dropped from $316 billion at the beginning of May to the current level of $38.84 billion.
As the U.S. Treasury anticipates issuing $600-$700 billion in Treasury notes in the weeks following the debt limit settlement, stock and cryptocurrency markets are expected to enter a correction period.
