HG MARKETS:

Unsurprisingly, at its May policy meeting, the Federal Open Market Committee (FOMC) opted to keep the federal funds rate target range at 5.25% to 5.50%. The FOMC has maintained unchanged rates for the seventh straight meeting. Ten months having elapsed since the July 2023 rate hike, greater than the average period observed over the previous forty years between the final boost and the first rate drop. The emphasis moved to the FOMC’s prognosis for future policy direction, especially in light of the depressing inflation data points. The policy statement restated that the economy is growing at a healthy rate and that job growth are still substantial, but it did not contain any significant surprises. The statement echoed prior comments made by Chair Powell and other FOMC members, but it also admitted that the 2% inflation objective has not been met. In light of the future, authorities are still waiting to contemplate lowering interest rates until they have more assurance that inflation would move sustainably toward the target. The statement stressed the committee’s willingness to modify monetary policy in the event that obstacles to fulfilling its dual mandate materialize. The balance sheet was the subject of the biggest modification to the policy statement. Beginning in June, the monthly cap on maturing Treasury securities rolling off the balance sheet will be reduced from $60 billion to $25 billion as part of the FOMC’s announcement of a reduction of quantitative tightening, or QT. The monthly maximum for mortgage-backed securities (MBS) stayed at $35 billion. The purpose of this change is to handle any funding constraints and problems with the financial infrastructure that come from QT’s liquidity drain. In line with his earlier statements, Chair Powell reiterated at the press conference that a decrease rather than an increase is anticipated in the federal funds rate going forward. The question of how long rates should stay at their current level in order to guarantee a suitably restrictive posture that can return inflation to the target of 2% is still the main emphasis. Because investors saw Powell’s comments as somewhat dovish, there were gains in stocks, rallies in gold and Treasuries, and a depreciation of the US dollar relative to the majority of G10 currencies. Future rate hikes are now priced in by the market a little more dovishly, with more cuts now anticipated by the end of 2024.