The Federal Reserve raised rates by 25 bp to a target range of 5.00-5.25% in unanimous vote at their April meeting as expected. Market Fed futures pricing suggested 88% of a 25-bps hike before the decision while the vast majority of economists were also predicting a hike with a handful predicting no change. Fed removed, “The Committee anticipates that some additional policy firming may be appropriate” Meaning a hiking bias here but no longer an explicit call to future hiking. Fed also added “Job gains have been robust in recent months, and the unemployment rate has remained low”
Federal Reserve FOMC Statement
Federal Reserve Announcement Wednesday 3 May 2023 14:00:00 ET
The FOMC raised the target rate by 25 basis points to 5.00-5.25% from 4.75-5.00%
Conference To Follow At 2.30 ET PM With Chairman Powell
Highlights
- Decision was unanimous for raise.
- Previous statement said “The Committee anticipates that some additional policy firming may be appropriate”… that has been removed
- Previous statement said “recent indicators point to modest growth in spending and production”, now says “Economic activity expanded at a modest pace in the first quarter”
- Previous statement said “Job gains have picked up in recent months and are running at a robust pace” now says “Job gains have been robust in recent months, and the unemployment rate has remained low”
- Previous statement said “Inflation remains elevated” and that’s unchanged
Market Reaction After FOMC
- Equities saw some volatility in immediate reaction to the announcement, but the major averages are back at levels seen 30 minutes ago.
- Dow 33731.40 +46.96 (0.14%)
- Nasdaq 12142.56 +61.87 (0.51%)
- SP 500 4134.54 +13.69 (0.33%)
- 10-yr Note +3/32 3.390
Market Reaction After Press Conference
- Dow -224.56 at 33459.88, Nasdaq -30.21 at 12050.48, S&P -21.27 at 4099.58
- The market trades at the lows of the day following Fed Chair Powell’s press conference.
Yields Lower After FOMC on Day:
Shorter-dated Treasuries have made a small addition to their gains in reaction to the FOMC Statement for May. As expected, the central bank raised the fed funds rate range by 25 bps to 5.00-5.25%, but the policy statement no longer says that “some additional policy firming may be appropriate.” This is being viewed as a sign that the Fed will refrain from additional rate hikes at coming meetings.
- 2-yr: -2 bps to 3.95%
- 3-yr: -5 bps to 3.64%
- 5-yr: -7 bps to 3.40%
- 10-yr: -5 bps to 3.39%
- 30-yr: -3 bps to 3.70%
Prior to release:
- 2-yr: -2 bps to 3.95%
- 3-yr: -5 bps to 3.64%
- 5-yr: -6 bps to 3.40%
- 10-yr: -6 bps to 3.38%
- 30-yr: -5 bps to 3.69%
May 22 FOMC STATEMENT CHANGES via @Newsquawk
The line about anticipating some policy firming has been removed and now the key guidance paragraph says:
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5 to 5-1/4 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
The full statement from the May 2023 Fed Decision
Economic activity expanded at a modest pace in the first quarter. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated.
The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 5 to 5-1/4 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. 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; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.
Implementation Note issued May 3, 2023
FOMC dot plot and central tendencies (From March Meeting)
EOY 2023 5.1 and terminal rate
- The Dot plot from March 2023 show the median rate at the end of 2023 at 5.1% vs 5.1% at the December 2022 projections
- For 2024, the median fed funds target rate is 4.3% vs 4.1% in December
- For 2025, the median fed funds target rate is 3.1% vs 3.1% in December
Source: Federal Reserve
From the TradersCommunity Research Desk