BY: Matthew Kimbrough
Portfolio Manager
Leading up to Today’s Decision
In March, we heard from Fed Chair Powell that recent high inflation prints (economic data on inflation received between the late-January and the mid-March FOMC meetings) could be just a “bump in the road” on the path back towards 2%.
Well, unfortunately for the Fed, the data released from March 20th until now has been even bumpier. The PCE Deflator didn’t budge on March 29th, Non-Farm Payrolls was another blockbuster result on April 5th, both core and headline CPI were above expectations on April 10th, and the PCE Deflator exceeded expectations on April 26th. This adds up to three straight months of solid employment data and inflation surprises to the upside.
Once again, market participants have reset their expectations for Fed activity for the remainder of the year. Alongside this reset, both the 2-year and the 10-year US Treasury Note are up around 40bp in yield since March 20th. Although March’s Statement of Economic Projections held fast, with three rate cuts still projected in 2024, the Fed Funds Futures market is now pricing in just one.
One thing is clear – the Fed is likely on hold for the time being. We won’t receive any amendments to the Fed’s economic projections until the next meeting in June, so investors will likely focus today on Jerome Powell’s press conference and attempting to ascertain his overall level of “hawkishness,” as well as any other statements that could potentially move markets.
The Decision
The Fed Funds rate remains unchanged. It has been held at its present range of 5.25 – 5.50% since the July 2023 FOMC meeting.
The Statement
This meeting’s Statement contained several significant amendments, including the following line that was added to the first paragraph about economic activity: “In recent months, there has been a lack of further progress towards the Committee’s 2 percent inflation objective.”
It also announced the official start of the QT taper. “Beginning in June, the Committee will slow the pace of decline in 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 in 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 Press Conference
In his opening remarks, Fed Chair Powell noted that “It is likely that gaining greater confidence will take longer than expected.”
Powell mentioned economic uncertainty in the press conference several times and the potential paths that the economy could go down in 2024. Essentially, if inflation were to move sideways, it could be appropriate to hold off on rate cuts, whereas if they do manage to gain “greater confidence,” then rate cuts could be appropriate. Also, if there was an unexpected weakening in the labor market, that could warrant rate cuts. “It really does depend on the data.”
He also stated, “It’s unlikely that the next policy rate move will be a hike. Our policy focus is how long to keep policy restrictive.” He added later, “The evidence is pretty clear that policy is restrictive and weighing on demand.”
When asked about stagflation, Powell responded that “Q4 GDP growth was over 3% and inflation is now under 3%… I don’t see the Stag or the Flation, actually.”
The Market Reaction
Powell’s press conference was perceived as more “dovish” than expected. Treasury yields declined by 5 to 7 basis points, and U.S. equity markets were up around 1% after the press conference concluded.
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