Market rate cut expectations are not justified
As was widely anticipated, the FOMC left the funds rate target range unchanged but unexpectedly made a technical reduction in the IOER rate of -5bps just to keep the effective funds rates, EFFR, in the middle of the 2.25-2.5% target range and to avoid breaching the upper limit of the target range.
The FED upgraded its assessment of both growth and labor markets as the economic activity has risen at a “solid rate" recently. Downside risks to the outlook have diminished.
Turning to inflation, FOMC members believe that the recent inflation softness is likely to be transitory. Factors responsible for the inflation softness should likely subside later this year, suggesting that current market expectations for a rate cut are unjustified.
On the balance sheet reinvestment policy, the FOMC statement gave no guidance, suggesting that all the details will be forthcoming in May.
Even if the tone sounds a little bit more “hawkish’, Chair J Powell emphasized that the current policy remains appropriate and as there is no sign of overheating in the economy, the FOMC members see no reason to change in either direction. The “patient” stance remains justified.
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