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Interest rates under question as central banks weigh options

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May 30, 2023

With interest rates sitting at 5.25%, many expected central banks would pause rate hikes, but strong U.S. job numbers and gross domestic product have called that presupposition into question. In particular, tightness in the labor market could drive up wages and entrench inflation, according to a report by CNBC.

The U.S. consumer price index has fallen from its peak of 9% in June 2022 to 4.9% in April. However, this is still above the Federal Reserve's goal of 2%.

Jerome Powell, chairman of the Federal Reserve, previously hinted there would be a pause in rate hikes in June, but other Fed officials have argued inflation will continue to influence monetary policy and possibly lead to more rate hikes.

In part, the personal consumption expenditures price index increased by 4.7% year-over-year in April, which could lead the Feds to push for increasing interest rates.

"If Powell cuts, he probably cuts a lot more than the market's pricing, but I think there is above 50% chance where he just sits on his hands, we get through year-end," Patrick Armstrong, CIO at Plurimi Group, told CNBC. "Because services PMI is incredibly strong, the employment backdrop incredibly strong, consumer spending all strong — it's not the kind of thing where the Fed really needs to pump liquidity out there unless there is a debt crisis."

Other central banks are facing similar issues, including the European Central Bank, which has its benchmark rate set at 3.25%, and the Bank of England which is facing inflation of 6.8%.