FOMC meeting, April 30–May 1

Most ‘paths’ still point to Fed easing this year

• The Federal Open Market Committee (FOMC) voted unanimously to hold the federal funds rate unchanged at 5.25% to 5.50% while the policy statement incorporated new “backward guidance.” Policymakers noted that risks to achieving the dual mandate “had” moved into better balance but stressed the “lack of further [inflation] progress” toward 2% in recent months.
  
  
• The Fed announced plans to start tapering its quantitative tightening program in June. It will reduce the monthly pace of runoff by adjusting the redemption cap on Treasury securities from $60b to $25b per month (slightly more than expected) while maintaining the existing cap on agency mortgage-backed securities at $35b.
  
  
• During the press conference, Fed Chair Jerome Powell confirmed that inflation data had not provided policymakers with greater confidence that inflation is moving sustainably toward 2% and that gaining such greater confidence would “take longer than previously expected.” With the Fed Chair noting that the FOMC was prepared to maintain the current federal funds rate for “as long as appropriate,” Powell signaled that a June rate cut was off the table.
  
  
• Powell provided a much-needed forward-looking perspective by introducing three potential monetary policy paths. He noted that two paths would lead to rate cuts this year — one where inflation is moving sustainably toward 2% and one where there is an unexpected weakening in the labor market. He also described a path where policy would be on hold, featuring a strong labor market and inflation moving sideways.
  
  
• As we have been stressing, Powell confirmed that the bar for rate hikes is much higher than for rate cuts. He stressed that “it’s unlikely the next policy rate move will be a hike,” while adding that the Fed’s “policy focus is on how long to keep policy restrictive.” When pressed, Powell noted the necessary condition for a rate hike would be “persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation to 2%.” This would seem to indicate the need for inflation to accelerate persistently.
  
  
• When asked about the current policy stance, Powell noted that the evidence clearly shows that monetary policy is restrictive and weighing on demand, and that “over time, it will be sufficiently restrictive.” He went on to add that he anticipated further disinflation this year even if his confidence was lower after the recent inflation data.
  
  
• It appears from Powell’s remarks that most (perhaps not all) policymakers continue to believe that the policy rate is at its peak for this tightening cycle and that it will be appropriate to ease policy at some point this year. 
  
  
• We believe that while there will likely be a personal consumption expenditures inflation plateau around 2.5% in the coming months, it is not so far above 2% that it would warrant excessively tight monetary policy. Disinflation is still in place based on first principles, and a laser-focused battle to rapidly bring inflation to the 2% target would do more harm than good for the US economy.
  
  
• Indeed, Fed policymakers want to be careful to avoid a policy mistake at this juncture. Labor market conditions remain robust, but labor demand is slowing. So far, easing inflation has been relatively painless, but this could change if monetary policy is excessively restrictive.
  
  
• We continue to expect two 25 basis points rate cuts in 2024, in July and November. This compares to markets pricing one rate cut in 2024 with an onset in September pried in at 65%.