Fed hike or pause? Traders and economists debate the Fed's next move

Investors have been yo-yoing on whether the Fed will continue its rate hike path or take a pause at its June meeting. Kleo Curry, Vice President at UBS Wealth Management weighs in on what's in store at the next meeting.

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 Jay Powell, said skipping an increase would give policymakers time to assess the data. Rate hike bets slumped around 35% in the aftermath of those comments.

Joining us now is Kleo Curry, UBS Wealth Management Vice President. Thank you so much for joining us this morning.

So I want to get your take here then on what are now the estimates for the Fed's action going from here. Is a pause and a wait-and-see perhaps the best move at this point?

KLEO CURRY: Sure. What we're seeing, essentially, is that there has been an increase on the Fed potentially hiking. Prior to last month, the markets were pricing in a near-zero percentage of the Fed actually taking a stance in hiking, and those numbers have been increasing week by week.

I would say at this point, the market is pricing in a near 30% to 40% chance that the Fed may hike. So at this point, I would say it is up for the Fed's decision. There is no clear direction as to what they will do. They've been hiking for much of 2022 all the way up from 0% to 5%, 5.25%.

So the market would like to see the Fed take a break and allow investors in the economy to allow some of what they've done to price in, but it's important to remember-- investors to remember that the target is 2%. That's the Fed's goal. We're at around 4.9 at inflation, and until we get closer to 2%, the Fed will use their measures to get that inflation rate back down.

So time will tell, of course, as to whether they pause or hike. But I will say there's a good debate on either side of that equation at this point.

- And obviously, there are different factors playing in here. Still seeing some of the repercussions from some of the banking fallout. Then, of course, you have the debt ceiling crisis that also had markets in something of a holding pattern here. What do you think is going to be the next catalyst?

KLEO CURRY: Good question. I will say this. It has been encouraging that the House passed the debt ceiling bill over to the Senate, which I believe will ultimately pass. That's great. One of the things that remains true is that the markets price in worries and fears, and so I believe that we will get through this debt ceiling debate.

The bill will pass over the coming days, and then the markets will continue to move on to the next headline news, which is we have a slowing economy that we're anticipating. We have sticky inflation, meaning it's not coming down in a straight line. So I believe between inflation and recession, once we get through this debt ceiling discussion, those are going to be the next things that are priced into the market.

And investors will be listening for opportunities as how to position their portfolios based on number one, how the Fed chooses to react to the hikes in the coming weeks. And then also, what we're also seeing in the labor market is a strong, strong labor force at this point.

- True. And then, when you look at what we're seeing with the consumer-- some of the guidance that we're seeing-- in some aspects, still some worries there over earnings season about some of the macroeconomic trends still weighing. But for the most part, if you look at how equities have been faring so far this year, it's really been doing very well.

What do you think the markets are correctly pricing in, and what is your outlook in terms of bracing for a recession-- if we're able to have a soft versus a hard landing?

KLEO CURRY: The markets have been incredibly resilient this year. And it is important to be insightful as to what's driven those returns. The vast majority of the returns in the S&P have been driven by seven mega tech companies. And so I do believe that it's important to be cautious within the tech space.

And being cautious means selective, so if there is an allocation in the investor's portfolio to the tech space and they may be overallocated, it's a good time to reposition some of that-- those funds in that sector over to the defensive consumer staples, utilities, those are the areas that I believe are poised for growth. But in the event that the economy slows down, those two areas typically perform well.

- So these opportunities there for people to be well positioned for this volatility. A big appreciation there. Thank you for joining me this morning. Kleo Curry, UBS Wealth Management VP. Thank you for your time.