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[Quick Facts]

1. The New York Fed: U.S. inflation expectations declined at the one-year-ahead horizon.

2. Most big Wall Street banks expect a "hawkish pause" from the Fed.

3. Fed's June rate resolution outlook.

4. Timiraos: Jerome Powell's big problem just got even more complicated.

5. Economic contraction tests Europe's determination to raise interest rates.

[News Details]

The New York Fed: U.S. inflation expectations declined at the one-year-ahead horizon

U.S. inflation expectations declined at the one-year-ahead horizon to 4.1%, the lowest level since May 2021, according to the Federal Reserve Bank of New York's consumer expectations survey released on Monday. In contrast, inflation expectations increased at the three- and five-year-ahead horizons to 3.0% and 2.7%, respectively.

The survey found respondents expecting lower food, rent, medical, and college costs over the next year and higher housing prices, marking the fourth consecutive month that people expect housing prices to increase. The projected gain in gasoline prices held steady at 5.1% for May. Meanwhile, people were more pessimistic about the outlook for loans in May. According to the report, "respondents' views about future credit availability deteriorated slightly," and "the share of respondents expecting tighter credit conditions a year from now increased, while the share expecting looser credit conditions declined."

Most big Wall Street banks expect a "hawkish pause" from the Fed

Most big Wall Street banks expect the Fed to keep interest rates unchanged this week while maintaining a hawkish stance due to a strong job market and rising inflation. Several economists say that it is a toss-up between a skip and a hike in the June meeting. Most banks expect the Fed to get the market ready for a rate hike in July. Money markets now expect a likelihood of 70% to suspend interest rate hikes this month, while rate cuts are expected to be postponed until next year.

Fed's June rate resolution outlook

Goldman Sachs economist Jan Hatzius' team is looking ahead to the June FOMC meeting as follows:

The FOMC will pause to raise rates in June before considering another hike.

Downside risks to the economy have abated. Of the conflicting signals, the resilience of hard data is more important than the weakness of survey data. Banking sector stress will not deliver a recessionary blow.

The soft landing process remains on track, but there is still a long way to go. Multiple labor market indicators have fallen sharply; core PCE inflation has fallen less than expected so far this year, but is expected to decelerate sharply later this year.  Inflationary psychology is normalizing and shows signs of cooling further.

With stronger economic activity and labor market data and firmer inflation data, the SEP is likely to revise 2023 GDP upward (+0.6 percentage points to 1%), the unemployment rate downward (-0.4 percentage points to 4.1%), and core PCE inflation upward (+0.2 percentage points to 3.8%).

The median dot plot is expected to show one more rate hike to a new peak of 5.25-5.5%.

Timiraos: Jerome Powell's big problem just got even more complicated

Nick Timiraos, a Wall Street Journal reporter, wrote that Fed Chair Jerome Powell's big problem just got even more complicated.

According to the article, Powell finds himself in a situation where no central banker wants to go: he must try to avoid a credit crunch, which requires a looser monetary policy; at the same time, he has to fight high inflation, which requires a tightening monetary policy.

Fed officials do not see the economic crisis as an imminent threat, and they blame the recent collapse of three banks on these banks' own idiosyncrasies. But current and former Fed chairs said the Fed will face a tougher trade-off if the stress worsens - Powell and his colleagues will have to choose between focusing on failing banks or high inflation.

Credit crunch could initially help the Fed by slowing the economy and easing price pressures, but a slowdown in credit growth could easily spiral out of control.

A risk to the Fed is timing. If inflation becomes entrenched in the public psyche and self-perpetuates, this could force the Fed to keep short-term interest rates at higher levels for longer.

Economic contraction tests Europe's determination to raise interest rates

After the German economy fell into a "technical recession", the Eurozone economy also shrunk.

On the one hand, the risk of stagflation facing Europe is increasing. As the European Central Bank kept raising interest rates seven times which have been gradually weighing on the economy, the European residents' consumption capability declined after the pandemic, and the energy crisis continues to exert impact, the European economic resilience has gradually dissipated and begins to face the challenge of long-term competitiveness weakening.

On the other hand, the European financial system continues to face the impact of monetary policy tightening and the U.S. banking crisis. On May 31, the ECB issued a financial stability assessment report that the uncertain growth prospects, persistently high inflation, and tightening financing conditions will continue to affect the balance sheets of enterprises, households, and governments. The Eurozone financial stability outlook remains fragile.

Although the ECB stressed that inflation levels are still too high, Europe's determination to continue to raise interest rates has been severely tested against the backdrop of gradually increasing risks of stagflation and increased vulnerability of the financial system.

[Focus of the Day]

UTC+8 14:00 U.K. ILO Unemployment Rate

UTC+8 18:00 ECB Governing Council member Hernandez de Cos speaks

UTC+8 20:30 U.S. CPI (May)

UTC+8 23:00 Bank of England monetary policy member Dingla speaks