Fed may be forced to defy market expectations and hike more aggressively, economist says

cnbc.com:

The U.S. Federal Reserve may be forced to defy market expectations by hiking interest rates aggressively again later this year if sticky inflation and tight labor markets persist, according to Daniele Antonucci, chief economist and macro strategist at Quintet Private Bank.

Having hiked by 25 basis points to take the Fed funds rate into the 5%-5.25% target range earlier this month, the market is pricing around a 60% probability that the central bank pauses its monetary tightening cycle at its June meeting, according to the CME Group's Fed Watch tracker of prices in the fed funds futures market.

The Fed has been hiking rapidly over the past year in a bid to rein in sky-high inflation, but the market expects policymakers to begin cutting rates before the end of the year. Annual headline inflation fell to 4.9% in April, its lowest for two years, but remains well above the Fed's 2% target.

Meanwhile the labor market remains tight, with jobless claims rising but still at historically low levels. Job growth also hit 253,000 in April despite a slowing economy, while unemployment sat at 3.4%, its joint-lowest level since 1969. Average hourly earnings rose 0.5% for the month and increased 4.4% from a year ago, both higher than expected.

Antonucci told CNBC's «Squawk Box Europe» on Friday that Quintet disagrees with the market's pricing of rate cuts later in the year.

«We think this is a hawkish pause — it's not a pivot from hawkish to dovish — it's a pause, the level of inflation is high, the labor market is tight, and so markets can be disappointed if the Fed doesn't lower rates,» he said.

Given the strength of the labor market, Antonucci suggested that a rate cut «seems an implausible scenario and it is only the first issue.»

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