The new data dependency

Unlike 2005, when the Fed clearly signaled to the financial markets the hiking mode was intact, traders are now adjusting to a more data-dependent atmosphere.

Some analysts previously forecasted an end to the tightening cycle as early as this summer. But thoughts have shifted in the wake of recent inflation data. Looking at some current (as of June 1) inflation measures, the core rate of consumer inflation rose 0.3 percent to 2.3 percent on a year-over-year basis in April. Meanwhile, the overall CPI posted a 0.6-percent jump in April to a 3.5-percent year-over-year reading.

“The premise that there will be a clear end to the tightening cycle is not entirely accurate — it depends on the data,” says Brian Dolan, director of research at Gain Capital Group/Forex.com.

This uncertainty has also spilled over immediately to currencies.

“Near-term moves are harder to forecast now,” says David Powell, currency analyst at Ideaglobal. “The FX markets will react to data in a much more exacerbated way.”

Many analysts expect a pause at the June meeting, assuming inflation pressures moderate. Analysts speculate that one or two more 25 basis point hikes are in the pipeline for later this summer or early fall, if the data warrants it. However, Powell thinks once the Fed stops hiking rates, the market focus will return to the growing U.S. deficits.