The Fed is about to end rate hikes with inflation set to plunge as high-income earners file for unemployment benefits at a record pace

• The Federal Reserve is about to end its interest rate hikes as wage growth is set to weaken, according to Fundstrat.
• The research firm expects a 25-basis-point rate hike in May and then a pause with inflation set to plunge.
• Fundstrat observed that Americans making more than $200,000 have filed for unemployment benefits at a record pace.

The Federal Reserve is gearing up for its last interest rate hike at its upcoming meeting with wage inflation set to weaken, according to a Wednesday note from Fundstrat.

Fundstrat expects the Fed to raise rates by 25 basis points next week but considers it a "dovish hike," saying the Fed will have more breathing room to allow for easing financial conditions due to a surge in unemployment claims from high-income workers.

According to the note, Americans who make for than $200,000 per year have filed for unemployment benefits at a record pace in recent weeks. That could ultimately give employers more leverage over employees and lead to slower wage growth.

"An estimate of 113,793 unemployment claims were filed by Americans earning over $200,000. This is the highest level since the pandemic and the trend shows this is accelerating higher, with this week likely to be the crossover point where the unemployment claims of over $200,000 earners exceeds unemployment claims of under $25,000 earners," Fundstrat's Tom Lee explained.

The surge in unemployment claims for high-income earners comes after a slew of layoffs at mega-cap tech companies in recent months, including Meta, Amazon, and Alphabet, among others. 

"Wage income might be deteriorating faster than is implied by jobless claims alone. That is a big deal in our view. Hence, the composition of jobless claims argues strongly for the Fed to do a 'dovish' hike. A +25 basis point [hike] in May and then a 'let's look around' and acknowledge that upside risk/downside risks are far more balanced. And this means Fed would tolerate an easing of financial conditions," Lee said.

Also supporting the Fed's potential decision to pause interest rate hikes after the May FOMC meeting is the turmoil seen in regional banks, which has led to tightening lending standards across the banking industry.

All of this should help ease the Fed's number one concern: inflation, which has already made significant progress in decelerating from last year's peak. 

This factor, combined with better-than-expected first-quarter earnings, gives Lee confidence that stocks will continue to trend upward throughout the rest of 2023.