Federal Reserve Confirmed Not in a Rush to Ease Rates at FOMC

The Federal Reserve kept rates unchanged in a target range of 5.25-5.50% in unanimous vote at their May FOMC, which was expected. Fed Chair Powell calmed fears during his press conference where he stated that it was “unlikely that the next policy rate move will be a hike.” The Fed tweaked their statement to recognize “the lack of further progress toward the 2% inflation objective” and to signal the QT tapering on Treasuries from $60 billion to $25 billion ($30 billion was expected) beginning in June. The FOMC communications struck a balance between ruling out nearer term easing, sticking to the line that the most likely next move is down, while pouring water on the risk of rate hikes. Stocks and bonds rallied with Fed Chair Powell’s press conference.

Fed Boardroom

Federal Reserve FOMC Statement 

Federal Reserve Announcement Wednesday 2 May 2024 14:00:00 ET

The FOMC kept rates at 5.25-5.50%

Conference To Follow At 2.30 ET PM With Chairman Powell

Highlights

  • Unchanged rates
  • Target rate 5.25% – 5.5%
  • QT pace $25 billion vs $60 billion ($30 billion was expected)
  • Economic activity described as ‘continued to expand at a solid pace’ vs ‘expanding at a solid pace’ prior
  • Jobs gains described as ‘have remained strong’ vs ‘have remained strong’ prior
  • Inflation described as ‘remains elevated’ vs ‘remains elevated’ prior
  • Adds line to say ‘In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.’
  • The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year
  • There were no dissenters.

Key Statement Changes from the Fed included:

Other than the QT announcement there were a few other significant statement changes.

  • The biggest change was the shift to this: “The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year.” Compared to this in the March statement: “The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance.”
  • This shows the Committee is indicating more confidence that risks to the dual mandate goals of full employment and stable 2% inflation have come closer into balance. That still signals they are short of mission accomplished but to say “have” moved, instead of “are moving” is signaling that their look at the whole suite of readings has them not giving up achieving their goals and on the next rate move being down, not up.
  • Another key was the reference to how progress on inflation has stalled out, meaning they are not being in a rush to ease.
  • The opening paragraph also shifted the tense on economic activity expanding at a solid pace.
  • Forward guidance was left unchanged. It remains data dependent and generic by repeating how “the Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge.”

Market Reaction

  • Stocks and bonds both went into rally mode immediately after the FOMC release. The S&P initially gained over 1%, 2s rallied by about 4bps, 10s rallied a touch, and the dollar weakened but each of these measures gave back most of those moves into the close.
  • Fed funds futures pricing for cumulative easing this year increased by a few basis points compared to just before the 2pmET statement. Markets moved closer to being on the fence between one and two quarter point rate cuts by year-end.
  • WSJ’s Nick Timiraos wrote: The Fed marked to market its policy statement to acknowledge recent inflation setbacks, but didn’t change the guidance section

Chair Powell’s Press Conference

Made it clear the Committee is in no rush to cut.

  • “so far this year the data have not given us that confidence” that dual mandate goals have been achieved.
  • “it is likely that further progress will take longer than expected”
  • “We’ve seen enough data and should take some signal and we are taking signal and the signal we are taking is that it is likely to take longer to gain confidence that we are on a sustainable path to 2% inflation.”
  • He repeated that they will make decisions meeting by meeting, conditional on data
  • “My forecast is that we will see inflation come back down over the course of the year”

When asked during the press conference “Is the current policy rate sufficiently restrictive?” Chair Powell said:

  • “I do think the current policy rate is restrictive and weighing on demand. You can see that in the labour market. You saw that in the JOLTS report this morning. The same is true of quits and hiring rates that have normalized. Consumers and businesses are indicating that the supply and demand of jobs has come back down. We believe it is restrictive and over time will be sufficiently restrictive.”
  • “We believe our policy is in a good place. We believe it is restrictive. You see it in the labour market. You see it in interest sensitive spending.”
  • “It’s unlikely that the next policy move will be a hike. Our policy focus is upon how long it would take to remain restrictive. We would look at the totality of the data. If we were to come to that conclusion that policy is not tight enough due to a totality of evidence then that’s what it would take to take that step” [ie: hike].

“Our decisions will depend upon incoming data, the totality of the data. We think policy is well positioned to address different paths that the economy might take. If we did have a path where inflation proves more resilient, and the job market is still strong, but inflation is moving strong then that would be a path to hold off on rate cuts. Inflation moving sustainably down could give us confidence to begin cutting rates. So could an unexpected weakening in the labor market. The data will have to answer the question for us in terms of peak rate.”

The full statement from the May 2024 Fed Decision

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage‑backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller.

Source: Federal Reserve

From the TradersCommunity Research Desk