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Executive Summary:

  • The Fed held its policy rate steady at 5.25-5.50%, as widely expected. The market had priced in virtually no chance of a cut at this meeting.
  • The Fed added a sentence to the policy statement explicitly noting that it has not seen further progress toward its inflation target. It also tweaked the statement regarding the risks to achieving its dual mandate, to recognize that risks are still better balanced over the past twelve months, but that progress slowed more recently.
  • Quantitative tightening was tapered more than expected to a $25 billion monthly cap for Treasuries (from $60 billion previously). The consensus call was for a cut to $30 billion per month. The runoff cap for MBS was unchanged.
  • During Chairman Powell’s press conference, he made it clear the Fed is not considering rate hikes at this time. The debate is just when rate cuts are coming, not if. He highlighted there are clearly scenarios where they could be on hold for a while, but the data will determine the outcome.

The Fed held its policy rate steady at 5.25-5.50%, as widely expected. The market had priced in virtually no chance of a cut at this meeting as inflation indicators have generally surprised to the upside, including yesterday’s Employment Cost Index (ECI) report that was above all economist estimates.

Fed policymakers acknowledge they have not grown more confident that inflation is moving sustainably back to 2%. The following sentence was added to the first paragraph of the policy statement: In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective. The sentence on risks to achieving its inflation and labor market mandates was also tweaked and now indicate the Fed believes risks have moved in better balance on net over the past year. The sentence previously read: The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance. In our view this is another way the Fed acknowledged the economic data have not broke their way on net in terms of the labor market and inflation since the January meeting.

The big news of the report was the Fed’s decision to reduce the pace of quantitative tightening (QT) beginning in June. It cut the monthly cap on Treasury runoff to $25 billion from $60 billion. The consensus view was the Fed would cut the cap to $30 billion per month. The MBS runoff cap remains unchanged at $35 billion. As we noted in our preview piece, only about half of that has actually been rolling off the portfolio per month over the past year. The Fed is clearly trying to separate balance sheet from interest rate policy as it focuses on approaching “ample” reserves more slowly than it did in 2019. In Chairman Powell’s own words, “The active tool of monetary policy is of course interest rates.”

During Chairman Powell’s press conference he continued to make clear the Fed has no intention of hiking rates further at this time. He noted, “We think policy is well positioned to address different paths the policy might take.” Better balance in the labor market was a key point he made in terms of signs that the policy rate is currently restrictive. Chairman Powell refrained from opining on whether or not the policy rate is ‘sufficiently’ restrictive. Instead, he commented the data will reveal whether it is or not going forward.


Zachary Griffiths, CFA
Head of IG & Macro Strategy

Winnie Cisar
Global Head of Strategy

Logan Miller
Head of European Strategy

Brian Perez
Analyst, Credit Strategy

Kathleen Tang
Analyst, Strategy



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