EconoFACTS

May 01, 2024 | 15:07

FOMC Monetary Policy Announcement: May Day Rate Stay

Economist

Deputy Chief Economist and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

Michael Gregory , CFA

Deputy Chief Economist and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

The FOMC kept policy rates unchanged on May 1, with the fed funds target range at a 23-year high of 5.25%-to-5.50%, which is where it has been since July. Amid the policy pronouncements, there was a sense the range could remain here for many more months. For “as long as is appropriate”, as Chair Powell put it in the presser.

There were two major changes in the policy statement. Added in the opening paragraph was the phrase: “In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective.” Assuming it’s going to take at least three months of good inflation performance to potentially turn this phrase around, this means the Fed has moved further away from cutting rates any time soon. It’s also a subtle walking back of the scenario portrayed in March’s Summary of Economic Projections in which the median fed funds call was for three rate cuts this year.

The other major change was the announcement on quantitative tightening (QT). The monthly run-off cap for Treasuries was lowered to $25 billion from $60 billion beginning June 1^st, with the (non-binding) MBS cap remaining at $35 billion. And when these payments ever get above the cap, they’ll be reinvested in Treasuries. The tapering (of Treasuries) was a bit more than expected, likely reflecting the Fed’s heightened sense of caution as QT gets more fully reflected in reserves reduction.

Also in the press conference, Powell said, despite the poor inflation start to the year, rate hikes are still “unlikely” (which is how he portrayed them back in December). Although he’s less confident than in the previous meeting, Powell still expects inflation to move down “over the course of the year”.

Bottom line: The Fed’s on hold and is happy to be there for as long as it takes.