Traders gear up for June interest rate hike after Biden renominates Powell

Biden announces his nominees for Chair and Vice Chair of the Board of Governors of the Federal Reserve System

Biden announces his nominees for Chair and Vice Chair of the Board of Governors of the Federal Reserve System

Wall Street is bracing for the Federal Reserve to raise interest rates from near-zero in June after President Biden on Monday picked Jerome Powell to lead the central bank for another four years.

Following the announcement, a majority of traders are pricing in at least a 25-basis point hike in June, according to the CME’s FedWatch tool, and about a 62% chance of three modest rate increases over the course of 2022. Another 32% are projecting a fourth rate hike in December.

President Joe Biden addresses the 76th Session of the U.N. General Assembly on Sept. 21, 2021 at U.N. headquarters in New York City.  ((Photo by Timothy A. Clary-Pool/Getty Images) / Getty Images)

"The economy is experiencing an increase in inflation, and the Fed has already taken steps to reduce their extraordinary stimulus measures, but they will need to move more quickly in addressing the inflation threats so that they don’t become entrenched," said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

FED TO TAPER BOND PURCHASES BY $15B A MONTH AS IT EXITS PANDEMIC-ERA POLICY

Powell, who was first nominated in 2017 by then-President Donald Trump, will be faced with critical policy decisions over the course of his second, four-year term. Consumer prices have soared by 6.2% over the past year, sparking fears about runaway inflation, raising questions about how central bank policymakers may respond as Americans pay more for everything from meat to clothing to gasoline. 

Fed officials began withdrawing support for the economy this month, announcing in early November that they would reduce the $120 billion in Treasury bond and mortgage-backed security purchases by $15 billion a month.

But Powell has given no hint that higher inflation will prompt him or other Fed officials to raise interest rates from their rock-bottom level, steadfast in his stance that those developments are not a reason to accelerate the central bank's plans. He has suggested the Fed will wait until the tapering of bond purchases concludes and until officials determine the labor market is fully recovered.

Sen. Elizabeth Warren, D-Mass., talks to Federal Reserve Chairman Jerome Powell before a Senate Banking, Housing and Urban Affairs Committee hearing on the CARES Act on Capitol Hill, Tuesday, Sept. 28, 2021 in Washington. (Kevin Dietsch/Pool via AP / AP Newsroom)

"We will be patient," he said. "If a response is called for, we will not hesitate."

Experts have called that philosophy into question lately and have questioned whether the central bank may be forced to act sooner than it's currently telegraphing to the markets.

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Combined with new evidence that the labor market is bouncing back from a summer slump – the unemployment rate fell to a new pandemic low of 4.8% in October as the economy added 531,000 jobs – the U.S. central bank may have no choice but to raise interest rates as soon as next summer. 

"It is hard to see how the Fed will be able to stay on the sidelines much longer," said Matthew Sherwood, global economist at the Economist Intelligence Unit.

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