Cleveland Fed's Mester sees no 'compelling' reason to pause rate hikes: Report

Bespoke Investment Group Co-Founder Paul Hickey and BNP Paribas U.S. Economist Yelena Shulyatyeva break down the latest comments from Cleveland Fed President Loretta Mester who told the Financial Times that she doesn't see a "compelling" reason for the Fed to pause its rate hike cycle.

Video transcript

BRAD SMITH: So the debt ceiling deal moves to the House. So the Fed's June meeting is very much the focal point for investors now. Before the June 14th decision, we'll have a lot more information for the data dependent Fed to chew over. On the docket are jobs openings today, as well as Friday's payroll number. And the all important CPI report, the day before their decision. Cleveland's Loretta Mester tells the Financial Times, she sees no reason to pause hikes. So what does our panel think?

Joining for the discussion, we've got Yelena Shulyatyeva, who is the BNP Paribas US Economist. And Paul Hickey, Bespoke Investment Group co-founder. Great to have you both here with us today. Yelena, I'll begin with you. What does this signal-- if you have Loretta Mester coming out and saying in full vocal force that there's still reason for us to look forward to some hikes, or at least ponder what that could mean if we do continue to input that into the economy?

YELENA SHULYATYEVA: Well, Ms. Mester is known-- is a known hawk, right? And she's not a voter this year. But definitely, we need to pay attention to what everybody is saying on the committee. And hearing this voices against the pause in June is actually quite interesting. I think what we need to pay attention to is what the voters are saying. And we'll get three speakers today who are the voting members.

So among them is Phillip Jefferson. And we're also going to hear from Pat Harker as well. I think that will be very interesting to hear what they are saying about June meeting. Also, remember that the key troika, right? Powell Williams and Jefferson himself, they are kind of like leaning towards a skip scenario, as they call it, right? So in June, I think they can afford to wait and see what happens. There's a lot of discussion about long and variable lags, of course.

And that needs to play out through the system. So we are still watching to see how this tightening in credit conditions is percolating through the economy. And I think that will be powerful enough to slow down the economy to such a degree that the Fed won't need to hike rates further. So this is our forecast, actually, that they will pause in June. And the data will deteriorate to such a degree that they won't need to hike further and they will stay on pause.

JULIE HYMAN: Interesting. So a pause-- maybe a skip depending on the data, but probably an actual pause or maybe even an ending there. Paul, what about you? What do you think the Fed is going to do? And it's interesting the degree to which the market is now saying, yeah, there's going to be another hike.

PAUL HICKEY: Yeah, good morning, Julie. So it's really-- we've had a major shift in pricing over the last few weeks. So I think a lot can change between now and the next meeting. But you see these comments from Loretta Mester saying, no compelling reason to even pause. Well, you look at leading indicators crashing. You look at yield curves. 75% of the yield curve is inverted right now. There's a much more preponderance of weaker and weakening economic data than there is stronger and accelerating economic data.

So I mean, I have a hard time squaring those comments with the reality on the ground. And it's this point where two years ago, the Fed was so dogmatic in its belief that they didn't need to hike rates, and look what happened. So now, you're seeing these officials coming out and being so dogmatic that we have to keep hiking rates, we have to keep hiking. And it just-- there should be some balance in views and to take one meeting off just to see what's going to transpire going forward is, I think, is a prudent approach to take care.

JULIE HYMAN: And maybe a sign that they're not that dogmatic perhaps, right?

PAUL HICKEY: I mean, I think that's what they should be doing. But then, you see comments like this morning saying that there's no compelling reason to even pause. It doesn't square. But as Yelena said, Mester is not a voter and she's been known for hawkish commentary in the last several months. So I mean, I would take it with a grain of salt. It seems every year, there are certain Fed officials that are just more bombastic in their approach, and just looking almost for headlines rather than to be taken real seriously.

YELENA SHULYATYEVA: And the Fed has to be data dependent. So let's talk about the data. The data are coming in, and there are signs here and there that things are actually slowing down. So you don't see it in the headline payrolls number. But there are declines in temporary workers, there are declines in overtime hours. And yesterday, we saw the Conference Board data which is telling us that jobs plentiful index is the lowest this cycle, actually.

So there are little things, and you have to look at the totality of the labor market data, and you see this some slowing down going on. Having said that, the labor market remains tight. But I think that would be taken care of by the Fed staying on hold at this high level of interest rates. And they will take care of inflation in at some point. So the labor market data, right? So we have this payrolls report coming up on Friday.

And we think we may see another upward surprise in the data where it 190, but over the last 13 months, the data have been surprising the consensus expectations, only to be revised down in the following months. So there's a lot of seasonality issues going on and we can talk about that. But I think overall, the labor market data is slowing. We're just only in that first slowing phase right now, not in the rapidly slowing falling down pace at this point. But that will come--

PAUL HICKEY: And we don't want to get there.

BRAD SMITH: Sure.

[INTERPOSING VOICES]

[LAUGHTER]

BRAD SMITH: Yeah. I mean, going further along with that, and I'll let you continue on that thought Paul because something that you brought up a second ago was-- yeah, we already know and have seen what the issues were in transitory for too long as a tone that the Fed was willing to continue to move forward with for an extended period of time. But what are the risks of tightening for too long without allowing for pause?

PAUL HICKEY: Well, it's just as Yelena was saying. Just getting into that point where you get into the more rapidly declining employment and pushing things over the edge. You look at inflation, there's complaints that inflation has been stickier than Fed officials would prefer. Services inflation has certainly been stickier. It's more plateau than coming down. But you just look at the five regional Fed reports covering the manufacturing sector. Prices [INAUDIBLE] paid components, on an average basis of those, are lower now than their historical average.

And so, if you look at the pace that they came up and that the pace they come down, it is nearly like an identical slope. Just to the upside and to the downside. So you don't get back to 2%. We didn't get to 6, 9% inflation overnight. You don't get back to 2% inflation overnight. It takes time. But to just keep pushing rates higher and higher just because it's not happening immediately, that runs the risk of slowing things down the road too much.

JULIE HYMAN: There's something else that's an important inflation input that I want to ask you both about. And Yelena, I'll start with you. Oil prices, which we really have been seeing come down sharply. We're looking at the one-month chart. They're back below $70-- back below $68 a barrel. Now, I know that the Fed doesn't look at fuel specifically, but obviously, this feeds through and trickles down. Is this helpful to see this kind of rollover in this and other commodity prices?

YELENA SHULYATYEVA: OK. Well, the way it works and becomes important for the Fed is through inflation expectations. So if we see oil prices going into gasoline prices-- which for the next CPI report we expect to decline quite sharply, and the reason is seasonal factors-- I expecting an increase during the spring driving season, but prices are actually going down. So that will show up as a drop in gasoline prices in the CPI report, which will help to weigh on the headline index.

And when headline CPI declines, that affects inflation expectations. So we see that in the University of Michigan survey, for example. And there's like a special index there as well. So that helps temper down inflation expectations, which is helpful for the Fed in the end. So I think falling energy price is helpful in that sense.

JULIE HYMAN: What about you, Paul? What are your thoughts on this tumble that we've seen in oil?

PAUL HICKEY: Yes. So you look at gas prices. They're up 11% year to date. That sounds like a big increase, maybe? But they're usually up at this point year to date, 18 to 19% year to date. So what you've seen is you've seen a much smaller than average increase in gas prices so far this year. And seasonally, they tend to peak right in early June and fall throughout the remainder of the year. So that should be, as Yelena was saying, a tailwind for inflation. And you look at crude oil.

Just in the last two months, you saw in early April, you saw OPEC come out and say, we're going to cut production in a surprise move. So crude oil, that rally lasted for about three to four days. And then prices stalled out right at the 200 day moving average and pulled back. You saw last week a Saudi minister tell the market that oil speculators betting against oil, better watch out. Well, that didn't really last long. Prices are right near a 52 week low today.

So when you see that jawboning have no impact on the market, it tells you that it's a weak market. And this all comes in the backdrop when the China reopening was supposed to boost oil prices. So we're at 52 week lows right now. I think in that respect, the oil market isn't telling you that the economy is really accelerating.