Notes From the Desk – FOMC Meeting: Steady as She Goes
Today’s FOMC meeting was as expected. The Federal Reserve (Fed) kept rates unchanged while announcing well-telegraphed changes to Quantitative Tightening (QT).
The key points:
- The Fed believes that it will take longer to reach the confidence that inflation will drop to 2%.
- For now, the uptick in inflation observed in Q1 is not a major concern. They believe that rates are currently high enough to lower inflation over time.
- Changes to QT were in line with market expectations. The balance sheet reduction is being done to minimize the possibility of a disruption in funding markets and repeating 2019.
- During the press conference, Chairman Powell mentioned more than once that he did not expect that rate hikes would become necessary or warranted.
The implications.
- The market was concerned about a ‘hawkish pivot’, with the door being opened to more rate hikes. With that probability being diminished, Treasury yields are 5-10 bps lower, and equities are rallying.
- To have the confidence to cut rates, they will likely need to see at least three months of good inflation data (heading lower) or the unemployment rate ticking higher (perhaps topping 4.25%). The bond market is priced for one to two cuts this year which is reasonable based on the FOMC meeting schedule.
