Surge in U.S. spending could force Fed off ‘pause’ in rate hikes

Coupled with possible progress on a debt ceiling deal to avoid a catastrophic U.S. default, the data throws doubt on whether the Fed will indeed "pause" its rate-hike campaign.

Federal Reserve policymakers got a dose of unexpectedly strong economic data on Friday that bolstered the case for further monetary policy tightening to bring down persistently high inflation.

Consumer spending surged 0.8 per cent last month from March, the Commerce Department reported. That’s good news as far as showing the economy’s not on the precipice of a recession, but bad news for policymakers looking for a slowdown that could ease upward pressure on prices.

Inflation by the Fed’s preferred gauge actually accelerated to 4.4 per cent from a year ago, the report showed, with core prices – a key measure of underlying pressures – gaining 4.7 per cent, up from the 4.6 per cent pace in March.

The Fed targets two per cent inflation.

Coupled with what appeared to be some progress in Washington on a deal to raise the debt limit and avoid a catastrophic U.S. default, the data throws doubt on whether the Fed will indeed “pause” its rate-hike campaign, as Fed Chair Jerome Powell signaled it might earlier this month.

Indeed traders are now betting the Fed will deliver an 11th straight interest rate hike in June, lifting the policy rate to a 5.25 per cent-5.5 per cent range.

Betting earlier in the day – and indeed for most of the time since the Fed’s last rate hike on May 3 – had reflected an expectation of at least a break in, if not an end to, the Fed’s policy tightening.

“The combination of inflation moving upward and consumer spending remaining so strong will increase the odds of the Federal Reserve raising rates another time in mid-June,” wrote Nationwide Chief Economist Kathy Bostjancic. Orders for durable goods also rose, supporting a further pickup ahead for the economy.