The May Fed decision needs no further introduction, but just in case it did, we provided a bit of additional color and nuance on Wednesday by way of some excerpts from the latest daily note by Nomura’s Charlie McElligott, who touched on the IOER situation, the deliberations around a standing repo facility and, of course, the outlook for the balance sheet.
In addition to those hot-button issues, the bigger picture obviously revolves around how willing Jerome Powell will be to push the envelope further in terms of dovishness following this year’s “epochal” pivot and announcement of the end of balance sheet runoff.
The Fed has come under relentless pressure from the White House. As late as Tuesday, Donald Trump called for a “one point” rate cut and reiterated that if QE were restarted, the US economy would take off “like a rocket”.
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Powell certainly has the cover he needs on the inflation side of the equation. Price pressures remain muted and Trump has used that as ammo when demanding asking for cuts. Larry Kudlow has resorted to similar tactics. On the other hand, the labor market is still running extremely hot and the advance read on Q1 GDP showed the US economy expanding at a 3.2% clip, although the internals were not impressive.
You can read a more in-depth preview of today’s decision here, but suffice to say Powell will likely be asked about the threshold for a rate cut (the so-called “insurance”/”recalibration” cut) and the statement is expected to contain modest upgrades to the assessment of current conditions, even as the inflation outlook will likely reflect weakness.
Here’s a snapshot of how the data has evolved since the March meeting:
(Goldman)
As far as markets are concerned, stocks have of course made new highs, rising in six of the last seven weeks. High yield spreads have tightened back inside of 380bps.
The dollar meanwhile, cruised to YTD highs despite the Fed’s pivot as the FOMC’s global counterparts concurrently adopted a similarly dovish lean and the US economy continued to outperform relative to RoW. 10-year yields – which hit their lowest since December 2017 following the March FOMC – rebounded, but have since retreated back inside of 2.50%.
And without further ado, the Fed is of course on hold.
We did in fact get the IOER cut (see the first post linked above for details on that) and the subdued take on inflation leaves plenty of room for the continuation of the committee’s “patient” (read: “dovish”) stance.
- Fed leaves funds rate unchanged, adjusts IOER to 2.35% from 2.4%
- FOMC: labor market strong, economy growing at solid rate
- FOMC: overall and core inflation have declined, below 2%
- FOMC: consumer spending, business investment slowed in 1Q
- FOMC: inflation compensation measures have remained low
- FOMC decision is unanimous 10-0; discount rate unch. at 3%
- FOMC repeats it will be ‘patient’ on interest-rate changes
- FOMC repeats references to global developments, muted inflation
All in all, this looks like the “dovish hold” the market was banking on.
Full statement
Information received since the Federal Open Market Committee met in March indicates that the labor market remains strong and that economic activity rose at a solid rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Growth of household spending and business fixed investment slowed in the first quarter. On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Implementation note
The Board of Governors of the Federal Reserve System voted unanimously to set the interest rate paid on required and excess reserve balances at 2.35 percent, effective May 2, 2019. Setting the interest rate paid on required and excess reserve balances 15 basis points below the top of the target range for the federal funds rate is intended to foster trading in the federal funds market at rates well within the FOMC’s target range.
As part of its policy decision, the Federal Open Market Committee voted to authorize and direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:
“Effective May 2, 2019, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 2-1/4 to 2-1/2 percent, including overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 2.25 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.
Effective May 2, 2019, the Committee directs the Desk to roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $15 billion. The Committee directs the Desk to continue reinvesting in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $20 billion. Small deviations from these amounts for operational reasons are acceptable.
The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”
In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 3.00 percent.
This information will be updated as appropriate to reflect decisions of the Federal Open Market Committee or the Board of Governors regarding details of the Federal Reserve’s operational tools and approach used to implement monetary policy.
