FOMC Rate Decision: Fed Keeps Rate Range Unchanged at 2.25%-2.50% but Cuts IOER by 5bps to 2.35%
As expected the FOMC left the rate range unchanged today and indicated they remain patient with the current state of policy despite a slightly stronger characterization of the economy than in the March statement. With core inflation well under the 2% target, rates are likely to remain unchanged until later this year unless inflation starts to move decidedly higher, and that doesn’t seem to be in the cards.
While the rate decision was a foregone conclusion, the drama in today’s decision was whether there would be any adjustment to the Interest on Excess Reserves (IOER) account and any increased concern over inflation trending lower and away from the 2% target. While we await the Powell presser, the statement did wax a bit more enthusiasm for the economy but also expressed a bit more concern that inflation remains well under the 2% target, With inflation pressures calm, the Fed has the luxury of time to remain patient and let the previous nine rate hikes continue to work their way through the economy. Thus, we see the funds rate stuck at its present 2.25%-2.50% until later this year, if not into 2020. We don’t see a rate cut unless there are definitive signs of slowing and we aren’t seeing those on the horizon at this time.
The other question heading into today’s meeting was whether the Fed would lower the IOER rate by 5bps given the effective funds rate has drifted within 5bps of the 2.50% upper band. This happened two times in 2018 and both times the Fed raised the IOER only 20bps when hiking the funds rate 25bps. With no hike in the funds rate this time around the Fed cut the IOER rate by 5bps to 2.35% as a technical adjustment. This cut should provide a little more headroom between the effective fed funds rate and the 2.50% upper bound.
The Treasury market was trading higher in price following the weaker-than-expected ISM number and following the Fed statement yields are moving a bit higher as the Fed is viewed as maintaining its patient posture but with little sign that a rate cut is in the offing anytime soon. Fed Chair Powell reiterated in his press conference that the recent drop in inflation is likely “transitory,” a term we often heard under the Yellen-led Fed. The full text of the statement follows:
Information received since the Federal Open Market Committee met in March indicates that the labor market remains strong and that economic activity rose at a solid rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Growth of household spending and business fixed investment slowed in the first quarter. On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey- based measures of longer-term inflation expectations are little changed.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Voting for the FOMC monetary policy action were: Jerome H. Powell, Chairman; John C. Williams, Vice Chairman; Michelle W. Bowman; Lael Brainard; James Bullard; Richard H. Clarida; Charles L. Evans; Esther L. George; Randal K. Quarles; and Eric S. Rosengren.
Thomas R. Fitzgerald
Director, Strategy & Research
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