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Fast Comment USFed leaves rates on hold; we expect the next move to be a rate cut

  1. Fed leaves fund rates unchanged, but the interest on excess reserves rate (IOER) was lowered
  2. Minor tweaks to press statement
  3. We expect the Fed to leave rates on hold this year, with the next step to be rate cuts next year
Fed leaves fund rates unchanged, but the interest on excess reserves rate (IOER) was lowered
As widely expected, the Federal Reserve maintained the target range for the federal funds rate at 2.25-2.50 percent at the FOMC meeting that concluded today. The vote was unanimous. However, the Fed cut the interest rate on excess reserves (IOER) by 5bp. The cut in the IOER is merely a minor technical adjustment to ensure that the fed funds rate stays closer to the middle of the target range. The meeting was not followed by an updated economic projection, so communication is limited to the FOMC statement and Chair Jerome Powell’s post-meeting press conference.
Minor tweaks to press statement
The changes to the press statement were minor, as recent data provide little reason for the Fed to change its “patient” stance in respect to future policy changes. Some modest changes to the descriptive language acknowledge the recent data, with unexpectedly strong GDP growth in the first quarter (that economic activity “rose at a solid rate” rather than “slowed”) and a drop back in core inflation (core inflation “have declined and are running below 2 percent” rather than “remains near 2 percent”), but there are no substantive changes to the rest of the text. Overall, everything points to unchanged rates in the near future. At the last meeting in March, the median projection for the policy rate path (“the dot plots”) signalled unchanged rates in 2019. The market’s initial reaction has been fairly modest. Markets are currently pricing in a higher probability of a rate cut than a rate hike this year.
We expect the Fed to leave rates on hold this year, with the next step to be rate cuts next year
The near-term downside risks are fading with signs of improvement in global manufacturing, a strong recovery in equity markets and GDP growth accelerating in the first quarter. However, the recent decline in core inflation and inflation expectations are a concern for the Fed. Furthermore, there are clear signs of underlying weakness in the US economy. More than half the growth in GDP in the first quarter was driven by temporary factors and the ISM manufacturing index in April hit its weakest level in two-and-a-half years. Overall, core inflation shows little sign of rising above 2 percent and we continue to expect that GDP growth will gradually slow this year as fiscal stimulus fades. In this environment, we expect the Fed to leave rates on hold this year, with the next step to be rate cuts next year.

Disclaimer
Anders Bergvall

Anders Bergvall

Senior Economist

Thematic analysis and USA

anbe83@handelsbanken.se

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