- Key rate left unchanged at 5.25%-5.50%

- Fed slows balance sheet reduction to USD 25 bln

- Policymakers not content with current inflation progress

- Powell: Rise in borrowing costs not on the horizon

- Rate markets price first cut in November

By Harry Daniels   

LiveSquawk News   

@HarryDaniels71    

1 May 2024 | 19:30 GMT

Ultimately, Wednesday’s interest rate decision and accompanying statement from the US Federal Reserve acted as a ‘placeholder’, with rate setters’ content to wait for further evidence that the current restrictive policy path was working to sustainably cool inflation.

As widely expected, the FOMC left borrowing levels unchanged at 5.25% - 5.50%. This element of the decision was never in doubt. Still, policymakers also announced a tapering of its quantitative tightening program, reducing its holdings of Treasury securities from USD60 bln to USD25 bln per month from the start of June.

The communique was modified to reflect an evolving inflationary landscape. The May rendering added an extra sentence to the first paragraph, acknowledging that “In recent months, there had been a lack of further progress toward the committee's 2% inflation objective.”

Officials also judged that the risks to achieving its employment and inflation goals had “moved toward better balance” over the past year, modifying the sentence from “are moving into better balance”. 

JPMorgan’s Michael Feroli remarked that “Even with these hawkish changes to the description of the economy and the risk profile, the guidance still points to rates on hold with the next likely move being a cut, and again only after the committee having gained ‘greater confidence’ that inflation is moving back toward 2%.”

In reality, many analysts were more focused on how Fed chair Jerome Powell would field questions around the outside possibility of a rate increase due to stubborn, elevated consumer prices.  `

And although the Fed chief conceded that there was now higher uncertainty around inflation and that price pressures had been stronger than expected, when pressed on the matter, Powell said the probability of further tightening was “unlikely”.

Feroli noted that the only discussion of rate hikes in the press conference was initiated by the press corps. “More generally, while Powell is obviously not content with the current inflation backdrop, it seems like he just doesn’t see sub-three percent inflation as a striking departure from the two percent goal,” the analyst concluded.

In the immediate aftermath, market participants said Fed-dated OIS priced in 28 basis points of rate cuts for the December FOMC meeting vs 26bps at Tuesday’s close.

Observers reported that the initial dovish market reaction mostly faded after the press conference, with EUR/USD and US 10-year treasury yields little changed from pre-meeting levels.

Ryan Sweet, chief US economist said “The changes to the statement were not as hawkish as they could have been.

“The Fed not taking the opportunity to strike a hawkish tone in the statement suggests that rate cuts this year are still on the table and that rate hikes are not, unless inflation takes an unexpected turn for the worse. For that to occur, oil prices would likely need to rise noticeably, or the job market would need to tighten.”