The Federal Reserve announced it would continue to hold interest rates at their current level in its May decision, but dropped the redemption cap for treasury securities to $25bn from $60bn.
In the Fed’s statement following the decision, it reiterated the 2% inflation goal for the US, which has proven difficult in recent months. In March, the consumer price index rose 0.4 percentage points meaning an inflation rate of 3.5% since the previous year. The US economy also underperformed in the first quarter of 2024, with real gross domestic product expanding by 1.6% annually rather than the pencilled in 2.4%.
Ronald Temple, chief market strategist at Lazard, said: “Jay Powell threaded the needle perfectly today. He reaffirmed the Fed’s commitment to getting inflation to target while maintaining flexibility to ease policy if employment weakens meaningfully. He did not take the bait to talk about hiking rates but clearly communicated instead that the question is about when, not if, inflation will resume its decline. I believe the FOMC’s cautious approach will be a winner over time as inflation subsides as we progress through the year.”
Currently, the interest rate for the Fed sits at a range of 5.25% to 5.5%, where it has stayed steady since July 2023. While the end of 2023 had some forecasting in the range of six rate cuts in 2024, the number has dwindled steadily throughout the beginning of the year as inflation remains a force.
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But Seema Shah, chief global strategist at Principal Asset Management, said the sticky inflation numbers have “dampened only some of Powell’s spirit”.
“After a spate of strong inflation numbers, the Fed cannot pretend that recent inflation surprises are simple blips in the data run,” Shah said.
“Yet Powell retains some confidence that inflation will decline from here, albeit lessened over recent months, suggesting that it’s a fairly high bar for rate hikes. Yet, before markets get overly excited, it’s worth remembering that the Fed is responding to the unfolding economic data, just as we all are. The next few months of data are pivotal for the Fed path.”
Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, also emphasised the role of incoming data on how the possibility of rate cuts could unfold in the coming months.
“Our analysis suggests that the Fed tends to deliver dovish surprises on FOMC meeting days and usually pivots during intra-meeting periods on the back of data flow,” Ahmed said.
“We expect inflation to remain sticky as demand remains strong leading to no cuts this year. However, even if Chair Powell has downplayed the risk of hikes, narrative wars are likely to continue if current economic trends continue.”
In the Fed’s statement, it reiterated Powell’s position that rate cuts would not be in the picture until inflation moves “sustainably” towards the 2% goal. The Fed’s new redemption cap of $25bn is set in place for June.
Whitney Watson, co-chief investment officer and co-head of fixed income and liquidity solutions at Goldman Sachs Asset Management, said: “The Fed’s balance sheet reduction today’s decision to taper quantitative tightening is a nod to liquidity considerations in the financial system, rather than a shift in direction.
“Nonetheless, we are taking a cautious approach to US rates until we see clear signs of progress tackling inflation. We prefer to focus on opportunities in rate markets like Sweden and Canada, where monetary policy is restrictive but inflation reduction is evident. Against a backdrop of resilient economic growth and corporate earnings, we also continue to see value in corporate and securitised sectors, which offer significant income potential.”
