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FOMC Review - May 2019
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The Federal Reserve officials unanimously voted to keep interest rates unchanged in the target between 2.25% and 2.5% in the May monetary policy review. Moreover, the US Fed Chair commented that the Fed is firmly on hold and not about to cut rates near term, citing strong job creation, ongoing economic growth, and weak inflation. He further added that their policy stance is appropriate at the moment and they don’t see a strong case for moving it in either direction.

Key takeaways from the latest FOMC meet outcome -

Inflation - a concern

Fed Reserve flagged currently "muted" level of inflation as a concern as it falls below the 2% target. This weakness is seen due to "transitory" factors, such as portfolio management services, lower apparel prices and airfares. The central bank further added that inflation should return to the 2% target over time and then be symmetric around its objective. According to the most recent data, the US inflation currently stands at 1.6%.

IOER Cut

The Fed cut its Interest on Excess Reserves (IOER) by 5bps to 2.35% from 2.45% but Powell stressed during the press conference that this should not be interpreted as the beginning of an easing cycle. It said that it has lowered IOER to bolster its control over monetary policy, a technical adjustment that didn’t represent a shift in its efforts to influence overall economic growth.

This was the third such adjustment in a year for interest on excess reserves, or IOER. In June and December, 2018, the step was taken after the effective fed funds rate drifted upward and threatened to reach the upper end of the target range.

US yields softened sharply in a knee-jerk reaction to the IOER cut but subsequently recovered on the realization that the cut was driven by technical factors.

No near-term change in balance sheet composition

Fed Chair emphasized that no changes in composition of balance sheet would be warranted in the near-term but that there could be a discussion of this later on in the year once it successfully concludes its balance sheet-run off. For the time-being, the maturity structure of composition of assets in the balance sheet is likely to remain unchanged.

US economy on a healthy path

Officials slightly upgraded their assessment of the economy, saying “economic activity rose at a solid rate” while “the labor market remains strong.” Powell expects that GDP growth will continue to rebound throughout the year with expectations of consumer spending and business fixed investment bouncing back even as these slowed in the first quarter. This could be boosting prospects for USD bulls and the case that Fed may not be done tightening yet.

 

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