Highlights:
- The target range for the fed funds rate was held steady at 1.50-1.75% in a unanimous decision.
- With the advance Q1 GDP report in hand, the statement confirmed consumer spending growth moderated (no mention of transitory factors that we think were at play) while tweaking the language on business investment, which continued to grow strongly.
- The committee acknowledged inflation has moved close to their 2% objective but still characterized market-based inflation measures as low. That is somewhat surprising with 10-year breakevens now at their highest level since 2014 and close to their longer run median.
- The statement dropped the phrase, inserted in March, that “the economic outlook has strengthened in recent months.”
- Risks to the outlook are still balanced but the committee no longer noted they are “monitoring inflation developments closely.” We think that is a nod to increased confidence that their inflation objective will be met on a sustained basis after spending much of the last few years below 2%.
Our Take:
Given the economic backdrop, it wouldn’t have been difficult for the Fed to justify a rate hike at today’s meeting. GDP growth remained above trend in Q1 even as transitory factors weighed on consumer spending. Inflation is now running at 2% year-over-year and even faster than that on a quarterly basis. Market-based inflation measures continued to increase and are now at multi-year highs. And despite some volatility, job growth has averaged more than 200k per month so far this year. But honoring their guidance that rates will rise only gradually, the Fed opted against back-to-back hikes and left monetary policy unchanged. We think the aforementioned arguments will prompt a rate increase at the next meeting on June 13. The few tweaks in today’s statement didn’t provide an explicit signal in that direction, but the Fed arguably didn’t need to with markets already almost fully priced for a move in June.
