Key Takeaways:
Torsten Slok says the market continues to price in a Federal Reserve rate increase before 2026 ends, even as conflicting data pulls the central bank in opposite directions.
The market continues to price in a Federal Reserve rate hike later this year even as June's weaker-than-expected jobs and inflation data pull the central bank in opposite directions, according to Apollo Global Management's chief economist.
"The market is still pricing in a Fed rate hike later this year," Torsten Slok, partner and chief economist at Apollo Global Management, said Thursday on CNBC's "Squawk on the Street."
The fed funds rate has sat at 3.50 percent to 3.75 percent since December 2025, after three consecutive quarter-point cuts. June's nonfarm payrolls report showed just 57,000 jobs added, well below expectations, while the consumer price index came in materially weaker than forecast, with headline prices falling on the month. Yet inflation remains above the Fed's 2 percent target — the May core PCE reading stood at 3.3 percent — and Fed Chair Kevin Warsh said July 1 that "prices are too high," declining to rule out further tightening.
The tension leaves the Federal Open Market Committee split heading into its July 28-29 meeting. Half of the 18 policymakers who submitted projections at the June meeting favored keeping rates unchanged or reducing them, while the other half advocated for a hike before year-end, the minutes released July 8 showed. CME FedWatch data as of July 13 put the probability of a rate increase at the July meeting at 36 percent, up from 18 percent on July 2. A hike would mark the first tightening since the Fed began cutting in late 2025 and would ripple through equities, bonds and the dollar.
The conflicting signals have created one of the most uncertain policy backdrops since the Fed began its current cycle. Nonfarm payrolls averaged roughly 93,000 per month over the past three months, below the 150,000 to 200,000 range the Atlanta Fed estimates as the breakeven rate for stable unemployment. The unemployment rate ticked down to 4.2 percent in June, but the composition of job gains — concentrated in government and health care — suggests underlying private-sector weakness.
Inflation has proven stickier. Core PCE ran at 3.3 percent in May, well above the 2 percent target. Energy prices, which had surged after geopolitical disruptions earlier this year, have since retreated, but the New York Fed's survey of consumer expectations showed one-year inflation expectations rose to 3.7 percent in June, the highest since September 2023.
The dollar has reflected the uncertainty. The US Dollar Index slipped to 101.10 on July 14, reversing gains from late June when hawkish Fed projections sent it to a 13-month high near 101.60. The 10-year Treasury yield traded around 4.55 percent on July 13, elevated by inflation concerns and uncertainty over the impact of geopolitical disruptions on energy markets.
The last time the Fed faced a comparable data split — cooling labor market alongside sticky inflation — was in late 2023, when the central bank held rates steady for seven months before beginning its cutting cycle in September 2024. That precedent suggests the Fed may prefer to wait for clearer signals rather than act preemptively.
For investors, a rate hike would compress growth-stock valuations by increasing discount rates, pressure highly leveraged companies with floating-rate debt, and strengthen the dollar, potentially weighing on emerging markets. A hold, by contrast, would validate the current risk-asset rally, which has pushed the S&P 500 higher into July on the back of robust fiscal flows and a growing private-sector surplus.
This article is for informational purposes only and does not constitute investment advice.
