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Fed meeting expectations change, traders now betting on a pause

Fed Governor Philip Jefferson's more dovish comments has investors pricing in a temporary pause, or "skip" as some analysts call it, to the Fed's rate hiking campaign. Stifel Chief Economist Lindsey Piegza joins Yahoo Finance Live to gauge the Federal Reserve's willingness to pause while inflation remains an issue.

Video Transcript

- Well, the framing of the Fed's plans are changing again. The market has switched bets for the Fed's June rate decision. The majority call is now for a pause at this month's meeting. The move comes after Governor Philip Jefferson seen as something of a proxy for.

Chair Jerome Powell said, "Skipping an increase would give policymakers time to assess the data." Rate hike bet slumped around 35% in the aftermath of the comments. Joining us now, Lindsey Piegza, Stifel chief economist. And Lindsey, keep me honest on your last name first. Did I get that right?

LINDSEY PIEGZA: You did. It's a tough one.

- Thank you. Let's get right into the Fed and what we're looking at. We had some Feds come out yesterday. What is your expectation now from the Fed for this June meeting? We're kicking off day one of June.

LINDSEY PIEGZA: Well, to pause are not to pause? That is the question for the Fed. And it's very clear that the committee is not of one mind. We heard earlier from Fed officials like Bowman, Mester suggesting that the Fed should not take a pause because the data at this point do not support a pullback or a temporary stay in policy as inflation still remains quite elevated, the consumer remains resilient.

But of course, we've juxtapose that with what we've heard from Jefferson, from Harker that suggest, well, maybe we take a step back, give the Fed time to assess earlier policy initiatives. Of course, monetary policy is assumed to come with some variable lag. But again, this is going to be a very fruitful conversation among Fed officials, particularly as we await those last data points before the June FOMC meeting.

- And some of those data points continuing in the thread of the employment situation there. And so for a Fed that's continued to lean on how the labor market is holding steady right now, how long can they continue to have that as their reasoning for either being hawkish or continuing to say, you know what? We're just going to move forward with that as kind of our backstop for the reasoning of our rate policy right now?

LINDSEY PIEGZA: Well, I think right now, it's pretty easy for the Fed to justify further policy action. Because to your point, not only is it seemingly met-- it has the Fed, excuse me, seemingly met their full employment mandate with a very tight labor market. But the other half of their dual mandate stable prices has not yet been met. Inflation is still quite elevated.

Now, I can see that we have come off of peak levels. But we're still talking more than double the committee's 2% target, giving the Fed ample evidence and support to continue along that tightening pathway. The question is, however, has earlier policy initiatives already done enough to tame inflation? And that we're simply waiting. We're simply allowing that earlier policy metrics to filter down the pipeline. So this is part of the discussion. Should we allow that time to pause and assess as opposed to continue to tighten while assessing earlier impacts?

- Now, Lindsey, let's take this inflation subject out a little bit further. So headline CPI-- or headline inflation is below 5% now. So it has cooled some. Do you think, based on that-- again, we're talking about a Fed that's been data dependent. Do you think that gives credence to the case that the Fed would pause at this next meeting?

LINDSEY PIEGZA: I think the Fed has indicated a willingness to pause, and they still may do so. But I want to be clear, any decision to move to the sideline temporarily will be made in spite of the data. The data, particularly the inflation data, do not support a pause at this point.

As I mentioned, both the headline and the core is still more than double the Fed's 2% target. But even so, if we strip out some of these components and look at housing or the proxy for shelter that we use in the CPI, this is still at a peak level of over 8%. Or if we look at core services, excluding housing, which is a proxy for the wage price spiral, which the Fed fears the most, this is still extremely elevated, more than double the Fed's target level.

So right now, the data still suggest further tightening is needed. And in fact, I would say that even those Fed officials that support a potential pause as early as later this month do suggest that further tightening will be needed after that temporary stay on hikes.

- Is there a magic number that you're looking for, Lindsey, when we do get the jobs report, the monthly report in non-farm payrolls, at least? A magic number perhaps that you're looking at to say that the Fed has no choice but to hike?

LINDSEY PIEGZA: I don't think it's quite that simple. And I don't think there's one data point that's going to make or break the Fed's decision. But I think when we look at the employment report in totality, the Fed's going to assess whether or not this supports the notion that we're still seeing ongoing tightness in the labor market or if we're starting to see a breakdown of that tightness.

So I think a headline number of 200,000, which the market is broadly anticipating, a minimal increase in the unemployment rate up to 3.5% still a market, excuse me, a multi-decade low in terms of the jobless rate, this still very much supports the Fed's notion that they can check the box of full employment.