FED Holds Rates Steady amid Stubborn Inflation
FED Keeps Rates on Hold
Summary: The Federal Reserve decided to leave interest rates unchanged due to concerns about inflation and affirmed the need for more evidence before considering rate cuts. Chairman Jerome Powell stated that it might take longer than expected for inflation to reach the central bank’s target of 2%. The Fed also signalled a cautious approach to shrinking its asset portfolio and outlined plans to reduce the risk of financial market turbulence.
Key Points:
- The Federal Reserve kept the benchmark interest rate steady at 5.25% to 5.5% due to lingering inflation concerns.
- Powell mentioned that more evidence is needed before considering rate cuts and that it might take longer for inflation to reach the 2% target.
- The Fed outlined plans to slow the pace of shrinking its asset portfolio and reduce the risk of financial market turbulence.
- The central bank emphasized a cautious approach towards quantitative tightening (QT) independent of rate cuts, as inflation progress towards the 2% target stalled.
Next Steps:
- The Federal Reserve will continue to closely monitor economic indicators, including inflation data, to determine the appropriate path for monetary policy.
- Chairman Powell emphasized the importance of flexibility and an adaptable approach in navigating the uncertain economic environment.
- Market participants will be watching for further guidance from the Fed on potential rate adjustments and balance sheet management in upcoming meetings.
- The central bank’s focus on maintaining price stability while supporting economic growth will guide its decisions moving forward.
Our Insights: the jobs report today will be critical with more data points needed to show a trend down in the inflation. As for rate cuts, there is the possibility of one in September right before the election in November. Otherwise, the first cut looks increasing likely to occur after the election. Finally, the language used by the FED was dovish and helped the markets. However, we feel that Powell should have used more neutral language given that for the last three months the inflation data has disappointed. What would happen now to the credibility of the FED if inflation is even stickier than expected and we end up having to consider a rate hike.
Update: the April US Payrolls Report came in at 175K versus the estimated 240K towards the lower end of estimate. In fact, only 3 estimates were for under 200K. The March report was too high and an outlier. FED and markets will be very pleased with report and now the September rate cut is looking increasing likely.
